Little Book that Beats the Market

Is it any good? Is it about valuation and stockpicking in general or is it mostly about his “Magic formula investing”…considering buying that and “you can be a stock market genius”

Its a pretty good book to read because it explains some very key concepts in a very simple language. However, its more suited for beginners and people with experience or those who already read on the subject would not get anything new. I usually recommend this book to people who have no prior knowledge on equity investment. If you tell me what you are looking for, I could probably recommend some books. For example, I would highly recommend Beating the street by Peter Lynch.

I’ll check out beating the street. I’m really interested in the valuation techniques that value investors use, but most are not really forthcoming with that info…

Have you seen the job ads that say “tell us in detail your investing philosophy and the metrics you use to make investment decisions, as well as the track record, and if we like it, we’ll consider interviewing you”? As for the little book that beats the market, it basically says to buy good companies (based on an ROA or ROIC metric) but do it at a discount (using a PE or PB) metric, and rebalance once per year. It’s designed for people who don’t want to do analysis on a very frequent basis. I forget what the portfolio construction method is. I think they recommend equal weighted.

Palantir Wrote: ------------------------------------------------------- > I’ll check out beating the street. I’m really > interested in the valuation techniques that value > investors use, but most are not really forthcoming > with that info… Expect to see supersadface chiming in on this topic, but here is my $0.02 I’ve recently read the Little Book that Beats the Marketbook (worth getting, yes). Greenblatt refers to Ben Graham style of value investing in his book. Tweedy Browne have published a 50 page pamphlet ‘What Has Worked In Investing’. It has a host of ideas that directly answer your question above. It is easy to find on the internet. Tweedy Browne also refer to Ben Graham in this, their seminal piece. Lastly, I recently read The Big Short by Michael Lewis. In it, he describes an individual investor who profited from the credit crisis in '08 named Michael Burry. Dr Mike Burry started off as a value investor and had great success selecting value stocks before he foresaw the impending crisis (possibly the first person to really see it coming). Mike Burry started out posting his musings and trades on a message board before becoming a hedge fund (seeded with $1m by Joel Greenblatt of all people) that amassed hundreds of millions. That message board still exists and you can see the criteria he used (e.g. current ratio of >2.5 and preferably over 3). All of which I have noted down. And guess what, Mike Burry refers to a certain Benjamin Graham in his writings. So, what am I reading now. Surprise, surprise - I am now steadily ploughing through Security Analysis (1934 edition) by Ben Graham. You really do have to start with that (and his Intelligent Investor) and take it from there. Let me tell you, it is no walk in the park (you may even want to consider one of the more modern versions but I like to start from the start and work forward). You will however pick up nuggets that give you a framework for investing. I am about 350 pages in out of 700. I can now tell you why you might want to avoid investing in banks and insurance companies if you are building a portfolio from a value investor perspective.

bchadwick Wrote: ------------------------------------------------------- > Have you seen the job ads that say “tell us in > detail your investing philosophy and the metrics > you use to make investment decisions, as well as > the track record, and if we like it, we’ll > consider interviewing you”? > > As for the little book that beats the market, it > basically says to buy good companies (based on an > ROA or ROIC metric) but do it at a discount (using > a PE or PB) metric, and rebalance once per year. > It’s designed for people who don’t want to do > analysis on a very frequent basis. > > I forget what the portfolio construction method > is. I think they recommend equal weighted. Criteria is effectively this for screens: 1) High Earnings Yield = EBIT / Enterprise Value EV = Market Value of Equity + net-interest bearing debt : allows you to put companies with different levels of debt on an equal footing when comparing earnings yields 2) High Return on Capital Employed = EBIT / Net Working Capital + Net Fixed Assets EBIT used to take out effect of different corporate tax rates and debt levels Greenblatt recommends holding for a year & selling losers for tax purposes. Think it is equal weighted. Has a website with the companies that meet his criteria magicformula investing if I recall correctly - off the top of my head.

I think it’s a worthwhile read. Short, entertaining, and really ingrains some key concepts (buy cheap, high quality companies).

naturallight Wrote: ------------------------------------------------------- > I think it’s a worthwhile read. Short, > entertaining, and really ingrains some key > concepts (buy cheap, high quality companies). agreed. A very quick read to start thinking correctly

Does anyone have the parameters for the screen?

http://www.magicformulainvesting.com/welcome.html very simplistic screener. The book is very basic and is effective for someone who wants to rebalance once a year without doing any due dilligence.

Dude_CFA Wrote: ------------------------------------------------------- > Expect to see supersadface chiming in on this > topic… DON’T MIND IF I DO! I like the ‘little book’ series, all that I have read have been well put together. I definitely recommend “You can be a stock market genius”, despite the “as seen on TV!” sounding title. These books offer a wealth of information on how to do screening, as well as the importance of minding the price you pay for a company very closely. My only criticism would be to not let a screen become your investment process. Some of these occasionally stray dangerously close to the idea of “Just follow this formula and turn your brain to ‘idle’!”. Historically, formula investing works riiiiiight up until the point…where it suddenly stops. I remember being in high school and reading an investing book - I forget the title - written by the founders of the Motley Fool. It heavily touted a modified “dogs of the dow” theory, based on back-testing. It suggested things like concentrate your portfolio in literally four stocks (the cheapest/worst performers in the dow, once a year), only rebalance once a year, etc. I went online to research more, where I found out the writers were now strongly disavowing the methodology, explaining that it ‘no longer worked’ and that investors should not, under any circumstances, follow their formula. I remember thinking that the Motley Fool staff were idiots for publishing a book that had to be redacted so strongly, so quickly. So yeah - these books are worth reading, owning, and re-reading. Just remember that screening for stocks is not the same as researching or valuing them. You’ve still got work to do once you run your screens.

Another Greenblatt book, “You Can Be a Stock Market Genius,” is another good one. It discusses some “special situation” stocks and its difficult to find books that explain those decently.

DudeCFA - Appreciate your thoughts, I have been putting off reading Ben Graham with various excuses like “oh it’s outdated etc.”. But I suppose if it is good enough for Buffet to Berkowitz to Burry, I’ll have to study it to get better. supersadface - what books do you recommend for valuations? I am looking for insight into the valuation techniques actual value investors use. I’m interested in seeing how they build projections/pick discount rates/how they justify price multiples etc.

Expectations Investing by Michael Mauboussin and someone else is a useful read.

Palantir Wrote: ------------------------------------------------------- > DudeCFA - Appreciate your thoughts, I have been > putting off reading Ben Graham with various > excuses like “oh it’s outdated etc.”. But I > suppose if it is good enough for Buffet to > Berkowitz to Burry, I’ll have to study it to get > better. Graham focused on aspects of analysis that he reckoned to be “timeless.” There are a few sections that are dated (like some parts of the section on the details of accounting for taxes in the Financial Statements Analysis section – a tax carry-forward is 20 years now instead of 2 years as when he was writing), but most of it is very relevant for today. The most difficult part of reading his stuff is that he uses a lot of arcane terminology (“surplus” = retained earnings; “earnings power” = earnings per share adjusted for various non-repeating expenses or gains like a huge charge for goodwill impairment; “gambling” = creating a risk that did not exist before the gamble; etc).

Anyone here read the updated versions of Security Analysis? Wonder how readable it is?

Palantir Wrote: ------------------------------------------------------- > I’ll check out beating the street. I’m really > interested in the valuation techniques that value > investors use, but most are not really forthcoming > with that info… In that case you can also try out “Value Investing: From Graham to Bufett and beyond”. The book is co-authored by four people who all follow value investing principles. However, most people suggest that one reads this after reading Intelligent Investor.

I took a quick look at a summary of Expectations Investing online at the URL below. While the material here isn’t earth-shattering to me – perhaps because I myself might be an “expectations investor” as the title suggests, and because so much of sell-side research focuses on trying to come up with a differentiated view relative to consensus / expectations wherever possible – I still recognize the relevance of many of the things mentioned here. I’ve never read the book itself, but if the summary is any indication, it looks like the book focuses on the importance of developing good stock sense in addition to just knowing various valuation techniques. As an example, it’s fairly self-evident to try to identify undervalued companies – sometimes this is easier said than done – but another way to make money is that stocks that may seem overvalued intrinsically may still be worth investing in if you think that there’ll be further upward revision to estimates or expect some type of positive catalyst, as an example. Anyway, obviously the best way to develop good stock sense is just to follow the markets every day and preferably have some skin in the game, but it seems like the book might add a different dimension towards analyzing companies beyond just their financial statements or wahtever. Could be a good complement to some of the more academic aspects of the CFA curriculum, though I’m sure anyone that’s read the actual book could offer a more susbtantive opinion. http://docs.google.com/viewer?a=v&q=cache:J5Doz8xm9cgJ:www.englishimpact.com.mx/Financing/Expectation%20investing.pdf+“expectations+investing”+filetype:pdf&hl=en&gl=us&pid=bl&srcid=ADGEEShotmG6azDcCMAkQ7S1MIMYNsU65LMLSviG-gWZzKalzDWADK4Wr7oY48gyjAYOVWptsKMrr9S8VJKs75mm7RLgKHbCxucG6BnIfOmu58ygK7W29h1csusT8pBU3ZXWgsb2jhqM&sig=AHIEtbSPCN6WUvPsCWz8PnpaaSlLzEDG-g&pli=1

What’s nice about the book is that it does a nice job of pointing out where the “pivot points” (for lack of a better word) are in a valuation and urges you to focus in on which one is most relevant to the company you are looking at. I need to go back and reread it.

Dude_CFA Wrote: ------------------------------------------------------- > Palantir Wrote: > -------------------------------------------------- > ----- > > I’ll check out beating the street. I’m really > > interested in the valuation techniques that > value > > investors use, but most are not really > forthcoming > > with that info… > > > Expect to see supersadface chiming in on this > topic, but here is my $0.02 > > I’ve recently read the Little Book that Beats the > Marketbook (worth getting, yes). Greenblatt refers > to Ben Graham style of value investing in his > book. > > Tweedy Browne have published a 50 page pamphlet > ‘What Has Worked In Investing’. It has a host of > ideas that directly answer your question above. It > is easy to find on the internet. Tweedy Browne > also refer to Ben Graham in this, their seminal > piece. > > Lastly, I recently read The Big Short by Michael > Lewis. In it, he describes an individual investor > who profited from the credit crisis in '08 named > Michael Burry. Dr Mike Burry started off as a > value investor and had great success selecting > value stocks before he foresaw the impending > crisis (possibly the first person to really see it > coming). Mike Burry started out posting his > musings and trades on a message board before > becoming a hedge fund (seeded with $1m by Joel > Greenblatt of all people) that amassed hundreds of > millions. That message board still exists and you > can see the criteria he used (e.g. current ratio > of >2.5 and preferably over 3). All of which I > have noted down. And guess what, Mike Burry refers > to a certain Benjamin Graham in his writings. > > So, what am I reading now. Surprise, surprise - I > am now steadily ploughing through Security > Analysis (1934 edition) by Ben Graham. You really > do have to start with that (and his Intelligent > Investor) and take it from there. Let me tell you, > it is no walk in the park (you may even want to > consider one of the more modern versions but I > like to start from the start and work forward). > You will however pick up nuggets that give you a > framework for investing. I am about 350 pages in > out of 700. I can now tell you why you might want > to avoid investing in banks and insurance > companies if you are building a portfolio from a > value investor perspective. Dude_CFA: Do you mind sending me an email I have a couple of questions I was hoping you might be able to help me out with. smwintersteen@yahoo.com