Joel Greenblatt's Magic Formula?

Discussion in 'Educational Resources' started by luag, Dec 15, 2005.

  1. luag


    Hi, I'm very new in this investing world.

    Upon my research on the net to find books i should read, i stumbled on Joel Greenblatt's "The Little Book That Beats the Market". This books seems to be very simple, basically explaining screening method he uses to pick stocks (high ROIC, high earnings yield) He even put a currently free website to pick the companies that reflects on his method at

    Can investing be really this simple?

    Can someone please enlighten me about this subject? :) thank you in advance.

    quote from the website:
    " Two years in MBA school won't teach you how to double the market's return. Two hours with The Little Book That Beats the Market will. Let Joel Greenblatt, Founder and Managing Partner at Gotham Capital (with average annualized returns of 40% for over 20 years) show you how "beating the market" can be made simple and easy.

    The Little Book does more than simply set out the basic principles for successful stock market investing, it provides a "magic formula" that is easy to use and makes buying good companies at bargain prices automatic. Though the formula has been extensively tested and is a clear breakthrough in the academic and professional world, the common sense method is convincingly explained using 6th grade math skills, plain language and humor. Readers will learn how to use this low risk method to beat the market and professional managers by a wide margin. Along the way, readers will also learn: how to view the stock market; why success eludes almost all individual and professional investors; and why the formula will continue to work even after everyone "knows" it."
  2. yes I believe in "magic formulas" also I believe in blatant marketing ploys and internet fraud. Ask the guy to provide you with some facts that he actually made money with this secret formula. Like real broker statements etc etc.
  3. 40% annual returns for his hedge fund. 'nuff said
  4. mahras2


    Considering he is highly well known in the value investing circles as well as being a professor at Columbia, yea I would say he is not some shady guy marketing a 5000%/annum FX system from his mom's basement.
  5. luag


    I knew that he is somehow a respected investor, but i didnt know that he is a professor. thanks for that.

    His points seem to be quite simple, from what i can grasp so far: find companies that are very likely to make money for themselves (high ROIC) and for the investor (high earnings yield). It makes sense to a newbie like me. The companies also seem to be diverse enough.

    I also wonder if he has done only this method to get that 40% over 20 years ^^;
  6. I've read the book. I enjoyed it immensely. There are many ways to look at its contents; the one that I prefer is:

    This is a fully mechanical, zero-human-judgement mechanical system for trading stocks. Its performance can be tested by programming the rules (there are only 2 rules) in a computer and running them over past history.

    The author claims to have done this himself (the gory details are in Appendix 1 & 2) including proper handling of dividends, delisted companies (avoiding survivorship bias), mergers, splits, and so forth.

    But those who are skeptical, are free to program the system themselves and test it themselves. There's no need to trust the author or uncritically accept his claims about performance. The system is fully disclosed and anybody that wants to, can program it up and perform their own tests.
    The "system" can not be backtested and verified according to this discussion on Wealth-lab.

  8. I believe it can be backtested using S&P Compustat database, but you have to adjust for survivorship bias that is inherent in a backward looking database.

  9. mindfull


    Joel Greenblatt also wrote,

    You Can Be a Stock Market Genius : Uncover the Secret Hiding Places of Stock Market Profits

    Quite a fun read but no simple rules. It deals with spin-offs, distressed companies and arbitrage. You have to do more work.

    I saw this new book in the bookshop. I think I might just stand there and read the whole thing. :)
  10. Hamlet


    I am willing to help anyone with programming skills in obtaining the required fundamental data needed to backtest and play with this system.
    #10     Jan 23, 2006