Joel Greenblattis one of my favorite authors in simple investing. Although there are not any “magic” methods to investing, the method he calls “Magic Formula Investing” is as close as it gets. Greenblatt’s book uses wit and humor to teach how the average investor can “beat the market” using a very simple formula.
The formula is based on buying good companies at bargain prices. It follows in line with much of what renowned investor (and teacher of Warn Buffet) Benjamin Graham taught. In fact, Greenblatt refers to Graham at times during his explanation of the method. However, unlike Graham style investing, the Magic Formula doesn’t require any background research other than what the formula does for you. Depending on the type of investor you are this is either a positive or a negative.
The active investor may choose to use the stocks found using this method as a starting point, and he may select stocks from the list that fit his current method. The passive investor needs only make a portfolio of about 30 “Magic” stocks, wait for one year, sell and repeat.
The magic formula was found using backtesting. Backtesting is a method of finding new stratagees that would have worked in the past. As with most stock strategies, past performances may not always continue in the future. With that said, it has been many years since this book was published, and it still continues to outperform the market. This is partially due to the “value” aspect of the formula, because it attempts to purchase stocks at bargain prices so that there is a higher probability of increasing profit. The rather large size of 30-50 stocks in a portfolio helps to at least “mimic” the market. The combination of large portfolio size and a technical selection helps to give it a great advantage.
The “Magic Formula” in Greenblatt’s Little Book that Beats the Market isn’t for everyone. In fact, you have to be committed to the formula for at least 3 years. Even though Greenblatt’s method has handsomely beat the market over an average years, it occasionally does NOT beat the market. Because of this occasional failure, the Magic Formula can only be used with those who truly believe it and have the guts to stay in for years even if it starts looking bad.
I recomend the Little Book That Beats the Market to the following people:
- Young investors who are getting started in finance.
- Investors who want a no-hassle & high return formula
- Investors who can withstand some ups and downs without selling out
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