The Little Book that still beats the Market by Joel Greenblatt - Best Guide for Investment

Hi guys, back with another book "The little book that still beats the market". 

This book is about value investing in shares without any large strategies / explanations / algorithms. Author explains the whole thing in simple common terms. By reading this, you come to know

How to value a business?  The way we have to view the market? (Don't troll it, its different from watch)

Professionals uses so many parameters to arrive the value of business but retail investors like us, unable to spend to much time on these parameter calculations and all. To ease this process of identifying good companies at bargained price, Greenblatt came with his "Magic formula" - (While you are reading this book, you come across this word "magic formula" almost more than in 00's, truly)

Joel starts this book with narration of a small business story, to value a business.

Read: The Psychology of Money by Morgan Housel

But before value a business, he compares the investments and returns when you invest your money in various asset classes. Like, we can put our excess money under mattress / kiddy box, but the money will not appreciate even a penny. Where as we can put our money in the bank or buy government bonds to get fixed rate of return at around 6% with full capital refund without any down risk. But we can get higher rate of return if you invest the same in bonds of corporates but we may loss small or all of our money including interest - (Yeah, we better get paid enough for taking the risk).

Coming to main course - we can buy shares of a company. 

Buying a share means we are buying a stake in the business by expecting better future earnings of the business. The earning from your share gives us more money than we would receive from secured fixed ROI instruments.

The share price of stock fluctuates between 52W High and 52W Low prices with in a year (52W) and to gain the best return on our investment that the best buy of a stock is at 52W low price and sell at 52W high price. But is that so easy? No not at all. 

Within a year (pretty short period of time, Right?), can the value of a business change that much? 

Is there any sudden spike in the business numbers?

I don't think so (except few turn around business / small cap companies). But it is a good idea to buy share of a company at a big discount to our estimated value of those shares. 

"Buying shares at a large discount to value, will provide you with a large margin of safety and lead to safe and consistently profitable investments".

Ok got it, we went to market and bought a share of company at discount price. Then what, now starts the main picture - What about future earnings and future prospects of the business you invested? 

Will future earnings be in align with our estimations?

Read: What is investment?

Here is the catch, return on capital, we buy a company with high return on capital by paying bargain (discounted) price, is the secret to making lots of money.

I think now you got what is author's "Magic formula". 

* Earning per share (EPS) - The company's profit per outstanding shares of stock.

* Return on capital (ROC) - The company's earnings against invested capital.

Now the main part of this book is, Greenblatt suggests that we have to give ranks based on ROC & EPS to all large companies or Small companies listed on your local exchange, the companies which meet the best ranking (both parameters), can be invested. This magic formula that seek to find good companies at bargain price.

See below example: 

If we give different ranks as per their ROC and EPS for the list of stocks (A,B,C,D....) from 1 to 14 (1 - Good, 14 - Not good), the lowest total value indicates that respective stock is good to buy. In below table B, G, E, C, D, H are best buys as the total rank value (ROC + EPS) is least.

The magic formula ranks stock in order. As a result, there should always be plenty of highly ranked stocks to choose from. The magic formula has been incredibly accurate indicator of how a group of stocks will perform in the future.

Joel is saying that they tried this magic formula for the last 17 years and it work well and beats the index average return in most of the year.

Of course, in short term (doesn't work for several years in a row), sometimes it won't work but in long term, magic formula works good.

Companies that achieve a high return on capital are likely to have a special advantage of some kind that they have opportunity to invest some or all of their profits  at a high rate of return. it can contribute to a high rate of earning growth.

However, ROC / EPS are calculated based on old earnings only, So we need to know the business and estimates the future earnings.

Better to get Magic formula stocks in different industries can be a sage and effective investment strategy.

You can buy this book from here: (click on the below image to buy)