The Little Book that Beats the Market
Book

The Little Book that Beats the Market

Joel Greenblatt
Wiley, 2005

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Editorial Rating

8

Qualities

  • Applicable

Recommendation

Whether or not this book’s "magic formula" delivers the results that author Joel Greenblatt promises, the book itself presents a lucid, simple explanation of investing in the stock market. Unlike many who write about investing in stocks and offer formulas for success, Greenblatt is remarkably honest in his discussion of the difficulty of beating the market and remarkably modest in his claims (although perhaps not quite as restrained in referring to his Web site). getAbstract finds that the chief merit of this bestseller is not its formula for success (which derives from guru Benjamin Graham’s value approach), but rather its clear, step-by-step introduction to the fundamentals of investing for novices. The author makes the market understandable to a child. That is quite an achievement.

Summary

Chewing Gum Lesson

Jason, who is in the sixth grade, has a very effective business model. He buys several packages of chewing gum for 25 cents each. A pack has five sticks of gum. Jason sells each stick of gum at school for 25 cents, making a $1 profit on each pack. With six years left before he finishes high school, Jason can expect to earn $3,000 in profits before graduation day. But if you wanted to invest in Jason’s company, how would you value it? That is not such a straightforward matter, although thinking about the value of Jason’s gum empire is a way to understand how the stock market works and how a sound investment plan should function. What would you pay for half of Jason’s enterprise? Not $1,500, surely, because that price would merely return your money to you. But why would Jason accept less, since he would stand to earn that much from half of his business?

No simple, universally correct answer exists to the question of what Jason’s chewing gum business is worth. Notions of its value depend on the circumstances of the person doing the valuation. Thinking through various possibilities, though, offers a way to understand the stock market a little better. ...

About the Author

Joel Greenblatt is the founder and a managing partner of a private investment partnership and hedge fund firm. He is an adjunct professor at Columbia University’s business school and the author of You Can Be a Stock Market Genius.

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