The little book that (still) beats the market

General Impression

This book laid on my shelf for a few months since I got it from Seeking Alpha. Now I am sorry I did not read it sooner.

The book is written in a very easy language, scribbled with humor, short little stories and simple examples. Not something you'd expect from a "finance" book. As a matter of fact, the language is so simple, coherent and flowing that you can easily read it before you go to sleep on a few days stretch, unlike other "financial" books in which one needs a great deal of concentration in order to get the maximum benefit from the book. Moreover, you need not have any prior financial knowledge whatsoever.

Summary of the concepts introduced in the book

In the book Joel Grinblatt lays down the reasons that for any period in history, businesses with high return on capital and high earnings yield generates the largest returns over time.

In the book, the author presents the "Magic Formula" which is simply choosing 30 companies out of 3500 based on the a score. The score is the addition of the company's rank in a sorted list of Earnings yield and sorted list of return on capital. The lowest score, the better.

The book explains in a very simple and humoristic language why will those stocks beat the general market and why they will continue to do so indefinitely (because the formula is comparative and not absolute like Ben Graham's NET-NETs. There will always be companies up in the list and down in the list).

The book teaches you that you must believe in your investing strategy and that in order to believe in it you must first understand why it works. It then teaches why the Magic Formula works and will continue to work, based on simple understandable logic.

The book portrays the reason the masses are not following the formula and the pit falls of it (patience, human nature, prolonged periods of time in which the Magic Formula underperformes the market, etc).

The book displays the results of the market versus the 30 highest companies in the list for 22 years (1988-2009). The market (S&P500) return in those 22 years was 9.5% per annum while the Magic Formula return was 23.8% per annum.

The most astonishing fact is that if you take the 3500 companies in the sorted list, and divide it to 10 groups of 350 companies, the 350 highest companies in group1, the 350 second highest are in group2, etc, you can see that yields achieved by group1 are better than group2, which in turn is better than group3, and so on. It is not just that the top picks of the formula beats the market, it is that it does it orderly. This is a very strong proof that this system works for the long term and is unique in the universe of investing.

Conclusion

This book is an ideal book for beginners and individuals with no prior knowldege in finance. It uses basic language and simple, coherent ideas.
Professionals should read this book to understand another approach and to learn what is expected from them.
Individuals and beginners should read this book to understand which parameters are more important in investing and what can they expect from their money manager, the market, and themselves. They will also learn that good results can be achieved by yourself, rather than using an expensive money manager.