🚀 The Book in 1 Sentence

An easy-to-follow investment strategy to help beginners dip their toes in the stock market waters.

Grab yours on Amazon.

🎨 Overall Impression

Joel does a great job in inviting readers from every background and knowledge level to understand the concept and how to implement it. The book is very thorough in its analytical approach to the formula and concept it teaches while at the same time very informal with stories to help the reader understand it.

Who Should Read It?

If you're looking to understand the stock market more in-depth and would like a hands-on approach with a few guided tactics then this is the book for you. Joel does not guarantee returns - nor does the formula but statistically speaking if you stick to it over the long term you will be in the green. I have been trying this for a few months and will do a recap at the 12-month mark.

☘️ How The Book Changed Me

• It taught me how to value companies
• It helped me understand market valuations
• It guided me through my first investment strategy - other than buying ETFs.

✍️ Top 3 Quotes

Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot.

“maintaining a three- to five-year horizon for your stock market investments should give you a large advantage over most investors. It is also the minimum time frame for any meaningful comparison of the risks and results of alternative investment strategies.”

"Although over the short term Mr. Market may price stocks based on emotion, over the long term Mr. Market prices stocks based on their value."

📘Summary

Meet the simple formula

In 2005, Joel thought about what gift he could give to his five children, that would keep on giving for years to come. Teaching them how to make money for themselves seemed like a good idea, and since his children were between six and 15 years old at the time, he’d have to keep it so simple anyone could understand.

The Little Book That (Still) Beats The Market was the result and became an instant bestseller since the simple formula telling you where to put your money spoke to a few more people than just his kids. In 2010 it was updated and expanded, hence the term “still” in the title now.

Here are 3 lessons to help you get the gist of Joel Greenblatt’s magic formula for investing:
1) Look at earnings yield and return on capital to evaluate stocks.
2) Rank and combine these two factors to find winning companies.
3) Be patient, it’s what makes this formula unpopular, but effective.

💵 Evaluate stocks based on earnings yield and return on capital.

I'm going to do my best to summarize these but you should really check out the book for a much more in-depth analysis.

Joel’s magic formula is based entirely on two typical numbers used to judge the quality of stock, combined with a few rules and guidelines.

The first is earnings yield. This number tells you how many dollars you can expect to make, per year, for each dollar you invest in a stock.

You need last year’s earnings per share (how much money the company earned, divided by the total number of shares available), and the current stock price to figure it out. Dividing the two leaves you with a number in the format earnings per dollar, or, simply, your expected return in percent. For example, if last year, the company earned $0.85 per share, and now the stock price is $17, you divide 0.85 by 17, which leaves you with an earnings yield of 0.05. That’s an expected return of 5% for your money or 5 cents for every dollar you invest.

The second number is the return on capital (=ROC). This is calculated by dividing the net, after-tax profit the company made last year, by the book value (the number on their official balance sheet) of invested capital. This tells you how much of your investment the company turns into an actual profit. For example, if a $500,000 investment into a new steel production plant has yielded a $200,000 profit in its first year, that gives you a ROC of 40%, which is really good. Joel says anything above 25% is solid.

🎯 Pick winning companies by combining these two factors and ranking them.

Okay, now what do you do with those numbers? You calculate them. For every single company available on a major US stock exchange, like the 3,500 you can find on either the New York Stock Exchange or the Nasdaq.

Then, you make two lists. On the first one, you rank all of the companies, starting with the one with the highest earnings yield. The second list you order by highest ROC. Now, you combine both rankings into one.

For example, if the company, which ranks first for earnings yield, ranks 153 for ROC, you add both numbers together, giving it a total ranking of 154.

In the end, this leaves you with a single, ordered list, telling you which companies perform best for both factors combined. Joel suggests you then invest in the 20-30 top companies on that list, and hold each stock for a year. After a year, sell winners and losers and repeat the process.

Note: Of course you don’t have to do all of this by hand. Joel’s come up with a nifty little tool to automatically calculate the list for you.

One thing to keep in mind 🧐 is that this tool will NOT rank them for you. So I manually created a Google Sheet with all the formulas and added a ranking component to it. If you want - dm me and ask for it. If enough people ask I'll create a public version of it.

Be patient, it’s what makes this formula unpopular, but effective.

How did Carl Richards say in The One-Page Financial Plan? The toughest thing about investing is that you have to be lazy, behave, and keep yourself out of new trouble, once you’ve set a good plan.

If you invested $10,000 in the US, based on Joel’s magic formula, in 1988, you would’ve turned those $10k into $1,000,000 by 2009 (yes, including the financial crisis). Fantastic results, right?

So why the hell doesn’t everyone do it already?

Because consistency is boring. If you follow this formula, you can’t tell your friends about “that new investing strategy you found” every 3 months. You can’t brag at all for a year, because only then do you find that year’s winners and losers. What’s more, this strategy actually might perform worse than the market at times (it usually does for one of every four years). Sometimes even two years in a row.

But if you rigorously stick to it, you are guaranteed to win. The sticking is the hard part.

That’s why money managers and financial advisors can’t use it. Their clients expect profits. Not just in the long run, but every year. That’s nonsense, of course, but it forces analysts to resort to short-term strategies, just so they can keep their clients satisfied all year round.