The Little Book That Still Beats the Market

Joel Greenblatt’s The Little Book That Still Beats the Market is a book that distils the complex world of investing into a simple, digestible formula for ordinary investors like myself. Having dabbled in the stock market for a while, I’ve seen many publications offering information on strategies, but this one stands out for its clarity, practicality, and Greenblatt’s knack for making the daunting task of picking stocks seem remarkably straightforward.

At the heart of the book is Greenblatt’s “magic formula,” which promises to help even the most novice investors find good companies trading at attractive prices. The formula is based on two key principles: finding companies that are both profitable and available at a bargain. Greenblatt introduces the concepts of return on capital (how effectively a company turns investment into profit) and earnings yield (essentially the inverse of the P/E ratio, showing how much you’re paying for a company’s earnings). According to the book, by combining these two metrics, investors can create a list of stocks that are not only well-managed but also underpriced by the market.

What I appreciated most was Greenblatt’s ability to make these complex ideas accessible. Instead of bogging readers down with financial jargon, he breaks down the ideas with relatable analogies, such as likening investing to buying candy on sale. The conversational tone and humour throughout the book make it an enjoyable read, even for those of us without a background in finance. I felt like Greenblatt was speaking directly to me, reassuring me that I didn’t need an MBA or years of Wall Street experience to become a successful investor.

However, while the formula’s simplicity is appealing, it’s also one of the aspects I’m slightly sceptical about. The idea that a mechanical formula could consistently beat the market feels a bit too good to be true. Greenblatt acknowledges this, stating that the formula doesn’t work all the time and that investors need patience—sometimes, several years of it. He emphasises the importance of sticking with the strategy even during underperforming periods, but I found myself wondering if I, or many others, would have the discipline to ride out those tough years. But as the saying goes; “Time in the market beats timing the market”.

Moreover, the book simplifies a lot of the challenges that come with stock picking. While the magic formula is a great starting point, it doesn’t take into account many qualitative factors that can affect a company’s future performance, like management quality or industry trends. In reality, investing is as much an art as it is a science, and while numbers can tell you a lot, they don’t always give the full picture. That said, Greenblatt does admit that his formula is not foolproof and that no one can perfectly predict market behaviour.

One of the most refreshing aspects of the book is Greenblatt’s honesty about how difficult it can be to stick with an investment strategy, particularly when it goes through periods of underperformance. He makes it clear that beating the market isn’t easy and requires patience, discipline, and a long-term outlook. This contrasts with many other investment books that often promise quick wins or guaranteed success. Greenblatt’s candour here is something I respect, as it adds a layer of realism to his otherwise optimistic message.

Another strength of the book is how it focuses on individual responsibility in investing. Greenblatt encourages readers to take charge of their financial futures, providing a step-by-step guide on how to implement the formula and build a portfolio. For those who don’t want to do the legwork, he even suggests ways to find professional help or invest in index funds, showing he understands that not everyone has the time or interest to become a hands-on investor.

In summary, The Little Book That Still Beats the Market is a valuable resource for both beginners and experienced investors. It offers a simple, easy-to-understand formula that, when applied with patience and discipline, can help investors outperform the market. While it may oversimplify some aspects of investing and requires a level of commitment that not everyone will be able to muster, the book’s core principles are sound and offer a great foundation for anyone looking to take control of their financial future. If nothing else, it’s an excellent reminder that, with the right approach, investing doesn’t have to be as intimidating as it seems.