This review covers Innovative Investment Insights from Joel’s Greenblatt’s “The Little Book that Still Beats the Market”. He is excellent! His book is innovative, it cuts against the grain, and it is practical!
Today’s blog post is a summary review from the perspective of an every-day family trying to make sense of the crazy world we all live in. Whether a seasoned investor or just starting, this is a must-read for anyone with a stake in “Mr. Market”.
This post may contain affiliate links. See my disclosure policy here.
INVESTMENT INSIGHTS FROM A HIGH LEVEL
I will cut right to the chase: I very much recommend this book to new and seasoned investors alike. Consider adding it to your personal finance library, today! Here are a few investment insights I really appreciate.
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Resource Richness & Readability
In general, Mr. Greenblatt does a really good job writing to a broad audience. I feel that the book is easy to follow, makes clear concise examples, and offers practical application for every-day use. This stands apart from other personal finance books I’ve read where the author(s) suffer in one or more of those areas. It is full of professional experience, vetted research, and does a good job of differentiating from theory, practical use, and what to expect from Mr. Market. Additionally, Greenblatt has an excellent sense of humor and comedic approach to the topics at hand. This is one of my favorite books!
Application & Adaptability
I’ll begin this section by recommending the careful application of The Little Book’s concepts. At a minimum, I believe it is important to have a budget, emergency fund, life insurance, and retirement savings in place before speculative investments. However, within those categories, it is helpful to apply some of the philosophy and work ethic from The Little Book. Even if you find yourself in some of the earlier stages of Getting Started Series, this book is excellent and I highly recommend it.
PRACTICAL INVESTMENT INSIGHTS YOU CAN ACT UPON
The Little Book starts with fundamentals, offers some fantastic examples, and then gradually shifts into the practical use of Joel’s “Magic Formula” approach to investing. While that may sound a little like a snake-oil sales pitch, the book is well-grounded. From there, the important parts, in my opinion, center on the value investing approach making stock selections.
DIY Approach and a Financial Education
Mr. Greenblatt makes great points about the importance of doing your own research and pursuing a financial education. This is not limited to professional academic training. If you haven’t started, consider using this book as the starting point of your own personal financial education. The approach and philosophy in this book are helpful for all areas of personal finance, not just investing. I passionately agree with this and encourage you to cultivate your financial education. Grow and apply Mêtis in your Money Matters!
As I previously mentioned, another point of interest is the general approach to value investing. Of course, there is more to it, but that’s where he starts: essentially where Benjamin Graham left-off. From there, the DIY approach looks for companies that offer superior returns on capital (relatively speaking) and are cheap (again, relatively speaking) at “bargain prices” as he puts it. The key is patience! This is NOT a quick road to wealth.
Understanding Mr. Market
Mr. Market is a key character in his book, and I think the analogies and story-telling make complex economic topics clear and concise. The key is that no one can consistently predict and perfectly predict “Mr. Market,” and the author generally warns readers against trying to “pick winners” in the stock market. I think there is a lot of wisdom to consider here. Rather, the key is to diversify, apply a strategy (see Magic Formula, in the section below), and stick with the plan. Oh, and be patient!
To avoid the appearance of conflict, Mr. Greenblatt points out that while stock picking most certainly isn’t for everyone (not even most of us), the Magic Formula approach might be a better fit. However, it employs and engages a portfolio approach to investing vs. hunting for “the one” stock winner. Mr. Market is a fickle master. While short-term gains could be enticing, it is the long-term that should be of primary focus. I really like this point, and I think it is a good reminder. It is easy to be drawn in with the short-term. However, he suggests the real gains are to be realized over time, over the long-term.
Investment Insights in The Magic Formula
The Formula portions of the book are quite helpful for me! I really like the value approach to investing, and I appreciate his approach to selecting investment opportunities in batches thereby diversifying risk. It starts with general concepts as made famous by Benjamin Graham’s value investing. Then, Joel modifies and adjusts and makes the formula applicable to “today’s” financial markets. After all, Mr. Market is always evolving!
I’ll be the first to say that I don’t apply this formula exclusively, but I think there is a lot of great – excellent – material to go off of. At the very least, flip through the book, read the parts about the Magic Formula, review the rationale, and check out his website where he has a screener built to identify those opportunities. The book also includes step-by-step instructions along with key ratios and how they are used.
Note, as clearly stated in the book, this approach takes time! Even years or more to fully realize the potential. Be sure you are ready before taking the plunge as the ride could always be rough. Also, I recommend avoiding investing when you are emotionally charged. It is easy to get excited about taking charge (a good thing), but balance that with the willingness to wait for the right opportunity. Be patient in your approach, and check out his website for yourself at Magic Formula Investing!
CLOSING THOUGHTS
This Little Book is both a great primer and an excellent refresher. This book will help you, regardless of where you are in your financial journey. I have a well-used copy in my library, and I frequently come back to it.
On that note, I certainly recommend the book. However, as with any book, this is only one approach for investing. Read it, digest it, and then read another book! Keep growing your financial knowledge. Great work, and keep up your diligent pursuit of excellence in managing your personal finances!
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