The Little Book That Beats the Market

updated 19 Jan 2023

"The Little Book That Beats the Market" is a book written by Joel Greenblatt, an American investor, hedge fund manager, and author. In the book, Greenblatt presents a simple and effective investment strategy that he calls the "Magic Formula" investing strategy.

The Magic Formula is based on the idea that investors can identify undervalued companies by looking at two key financial metrics: earnings yield and return on capital. Earnings yield is a measure of a company's profitability and is calculated by dividing earnings before interest and taxes (EBIT) by enterprise value. Return on capital is a measure of a company's efficiency and is calculated by dividing EBIT by invested capital.

Greenblatt's strategy involves ranking companies based on their earnings yield and return on capital, and then buying those that score well on both metrics. He argues that companies that score well on these metrics are likely to be undervalued by the market and have strong fundamentals, which makes them good candidates for long-term investments.

The strategy is simple and easy to implement, and it is based on the principles of value investing, similar to those of Benjamin Graham and Warren Buffett. Greenblatt emphasizes the importance of thorough research and due diligence when making investment decisions and encourages investors to focus on the intrinsic value of a company, rather than its stock price.

It's worth noting that the strategy is a back-tested one, and it's important to be aware of the limitations and risks of back-testing a strategy before applying it to real-world investing. Also, it's important to consider the strategy as a starting point for further research and not a final decision.

Overall, the Magic Formula investing strategy presented in "The Little Book That Beats the Market" is a simple and effective approach to finding undervalued companies and making profitable investments, it's based on value investing principles, and it's easy to implement.

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The Little Book that Beats the Market