Book Review > The Little Book That Beats The Market

As implied by the title, this is a little book (155 pages and will probably take two or less hours to read) and promises to show the reader a "magic formula" for beating the stock market – well, at least Wall Street. It also aims to encourage young people to take a greater interest and gain a better understanding of the investment world by demystifying the jargon and the unnecessary complexity.

Greenblatt is a professor at the Columbia Business School (as well as managing partner of a private investment company) and the "lecturing" side of things shows in the writing style. Perhaps the repetition is intentional but it can be tedious and, in my view, unnecessary.

The book documents the findings of a study tracing the historical performance of stocks over a period of 17 years and finds that by focusing on return on capital and earnings yield, investors can achieve some outstanding results.

A word of caution – the author is very specific in stating that these are Wall Street based stocks and exclude:

"… all utilities and financial stocks (i.e., mutual funds, banks and insurance companies)…" and

"… all foreign companies…" (p.136)

The validity of the model, (meaning the applicability/suitability to the Australian market conditions), is also potentially compromised by the fact that it works "best" when a large number (3,500 companies) are used. Of these 3,500 companies many are capitalised at $100 million or less and may not be suitable to our environment.

After reading the first three or four chapters I thought I was about to learn a good deal about "value investing" and the importance of some key metrics. By the time I reached the end I found myself thinking that what I had was a "novel" way of constructing an investment index that with regular monitoring and trading might result in a better then average return.

Greenblatt does warn readers that a key reason for so many people not following the "magic formula" is that it may appear too simple. I may well be one of those.

The fundamentals presented in the book are, in my view, sound even if incomplete. I also believe that it may well help people understand the dynamics of the market place but I remain cautious about its applicability (or at least validity) in the Australian environment.

Artur Santos is a member of the AIA.