The Little Book That Still Beats the Market

Written on June 12, 2011. Written by .

Successful fund manager Joel Greenblatt promotes a simple and historically effective formula for beating the market in The Little Book That Still Beats the Market. The formula just considers to basic value-investing metrics, the price to earnings ratio and the return on capital. The formula says to exclude stocks below a threshold market capitalization, exclude foreign stocks, utilities, and financials, and then sort all remaining stocks in two lists sorted by lowest price to earnings and highest return on capital. The add the rankings from the two lists and buy the top stocks with the lowest sum. Most of the book is about explaining the most basic concepts of stock investing and the justification for why the formula works. Greenblatt’s historical analysis indicates that it beats index funds by a huge margin, but the trick is that over the short run it often does very poorly. He suggests that the formula continues to work because not enough people can maintain their confidence through years of under-performance.

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