It has been almost 5 years since value investor Joel Greenblatt introduced The Little Book That Beats The Market. The book highlights a simple value investing strategy which focuses on finding great companies at attractive prices. To find great companies the Magic Formula uses Return On Capital (EBIT/ (Net Working Capital + Net Fixed Assets) a simple metric that measures how well a company is using its capital to generate returns. The other metric used in the Magic Formula is Earnings Yield (EBIT/Enterprise Value), which measures the company's yield versus a comparable rates such as a 10 year treasury yield to determine if the stock is undervalued or not. For example, say current 10 year Treasury yields are at 2%. If a company has an earnings yield of 12%, the stock would be attractive. In cases where treasury yields are low when compares to historical numbers, Joel Greenblatt recommends using an default 6% yield to replace that low yield. Either way, if the earnings yield is 12% vs. 6%, the stock would be considered for purchase.
A couple of events have occurred since the release of the original "Little Book." First, the website that accompanied the book has been completely re-designed. With the new look came a couple of changes such as the removal of earnings yield and return on capital which allowed individual investors to see why the stock was classified as "magic formula".
The second major change comes from the launch of formulainvesting.com. Apparently, after the original book was released, the magic formula started to develop a following. Among the following, a number of individuals were having difficulty automating and applying the magic formula strategy to fit their needs. As such, Joel Greenblatt launched formulainvesting.com to allow individuals or give individuals the option for Formula Investing, LLC to manage the portfolios automatically at an affordable fee which is currently a 1% management fee.
The Little Book that Still Beats The Market Product Review from Amazon.com
Joel Greenblatt shows you how to make the most of his "magical formula" investing strategy
In The Little Book that Still Beats the Market, Joel Greenblatt expands upon the successful strategy from his original bestseller to show you how to profit in any market. Through entertaining anecdotes and practical pearls of wisdom, this book explores the basic principles of successful stock market investing and then reveals a "magic formula" that makes buying good companies at bargain prices automatic.
It also ties into Greenblatt's latest effort (formulainvesting.com) that allows you to either manage your own account or have you account professionally managed by someone on Greenblatt's team. Either way, the magic formula still holds, and the new Web site just makes it that much easier to implement.
- The formula detailed here has been tested over hundreds of different periods, and thousands of stock picks, and has been proven extremely profitable
- Greenblatt guides you down the path of investment success and explains why his approach will continue to work-even after everyone "knows" it
- Reveals how you can achieve extraordinary long-term investment results with a very low level of risk
Why would Joel Greenblatt update the "Little Book"
First, I believe he is trying to revive confidence in the magic formula. Several investors/bloggers have given the magic formula investing system a ride and have been a bit disappointed by the results. Secondly, I believe he owes the people who have signed up for formulainvesting,com some kind of update of where the magic formula is, how it has performed (they have performance results on their page), and where it is headed. In recent interviews with Forbes and CNBC, Joel Greenblatt has stated that he has been busy creating and backtesting the magic formula on his own basket of International stocks (see below). Finally, and I don't blame him, he is trying to drum up some new business for formulainvesting.com.