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The Little Book That Still Beats the Market (Little Books. Big Profits 29) Kindle Edition
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An Exclusive Q&A with Author Joel Greenblatt
In my mind, the principles of value investing have not changed. As we've learned yet again, markets can be volatile and emotional. They often go to extremes of pessimism and optimism, and prices can and often do fluctuate wildly and significantly over short periods of time. As a result, Mr. Market can provide some excellent opportunities to purchase bargain priced stocks when people are unduly pessimistic. This is where value investing comes in. Buying companies below their true value is the road to being a successful investor. The magic formula found in the Little Book seeks to buy a group of above average companies but only when they are available at below average prices. Because it is a formula, it seeks to do this in an unemotional way that can take advantage of the market's mood swings. Ben Graham taught us these lessons in the 1930s and the principles still hold as well today as when he first wrote them down more than 70 years ago.
Do you think individual investors should re-think their investment strategy as a result of the recent market crash and recession?
I think the best lesson that can be learned from the recent price drop and partial recovery is that stocks are volatile. For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor's portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There's no sense investing such a large portion of your assets in a long-term strategy if you can't take the pain when your chosen strategy doesn't work out for a period of years. The "magic formula" found in the book can underperform the market for years. It can also lose money if the market goes down. But it is also a strategy that makes a lot of sense and that should work well for investors over the long term.
Can you explain the Magic Formula's basic strategy in one sentence?
The Magic Formula strategy is a long-term investment strategy designed to help investors buy a group of above-average companies but only when they are available at below-average prices.
You make reference in the new afterword to receiving a number of emails from readers after the The Little Book That Beats the Market was published. Could you share with us some of the comments you received?
I received many emails after the first edition of the book was published. Some suggested that the strategy was working great for them while others reported that they had waited over a year and the strategy was underperforming. These results and emails are consistent with the message of the book. Over the five years since the book was published, the strategy earned very nice returns for investors, but the ride was bumpy. Not only did the formula underperform for a period of time, in 2008 it lost money along with the market. Overall, the formula performed quite well but only for those who maintained a true long-term perspective. This is easier said than done. In the new afterword, I try to give more facts, color and information about the strategy that I hope will help investors be successful in taking full advantage of the magic formula over the long term. Of course, I also got plenty of emails where investors just asked us to do it all for them. Other emails asked us to apply the formula internationally. As a result, we have worked on both of these projects over the last several years.
In the new afterword, you write "Beating the market isn't the same thing as making money." Can you elaborate on this and why it's a difficult concept to swallow at times?
Since the strategy involves buying a portfolio that is 100% long the stock market, if the stock market goes down, our portfolio may well go down, too. If the market drops 40% and we beat the market by losing only 38%, this is small consolation. As I say in the afterword, while I firmly believe that for most people an investment in the stock market should represent a substantial portion of your investment portfolio, how big that portion should be can vary widely. For some it can be well over half of assets, for others well less than half might be appropriate. The magic formula strategy is a wonderful strategy for that portion of your portfolio that you choose to invest in the stock market. In fact, I truly believe that the magic formula remains one of your best options. How much to invest in the stock market, however, is a very personal decision that should be partially based on your ability to withstand short-term negative price movements. One encouraging fact, though, discussed in the afterword is the performance of our large cap portfolio over the last decade. Over that period, the market as measured by the S&P 500 was actually down, yet our backtests showed that following the formula over those same ten years would have resulted in a more than tripling of your money. Unfortunately, those great long-term returns came with plenty of bumps, including some not so short periods of losses and underperformance. But once again, if the formula worked every day, every month and every year, everyone would follow it and it would be ruined. Fortunately, it's not so great, and as a result I strongly believe that long-term investors should continue to benefit from the magic formula for many years to come.
- ASIN : B003VWCQB0
- Publisher : Wiley; 1st edition (July 16, 2010)
- Publication date : July 16, 2010
- Language : English
- File size : 438 KB
- Text-to-Speech : Enabled
- Screen Reader : Supported
- Enhanced typesetting : Enabled
- X-Ray : Enabled
- Word Wise : Enabled
- Print length : 112 pages
- Lending : Enabled
- Best Sellers Rank: #49,827 in Kindle Store (See Top 100 in Kindle Store)
- Customer Reviews:
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Top reviews from the United States
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However it's bit of a fairy tale to expect something as simple as this book can make you 20%+ every year for a long time. I'm curious how many readers have actually followed this formula ... like I did. Cruel truth: over the past 2.5 years, the magic formula underperformed SP500 for more than 30% (SP500 + 20%, VS magic formula -12%). This is a huge gap to overcome, so even if i keep trying and wish everything goes well like the book says, i expect my first underperform period (vs SP500) will be at least 5-6 years.
5 years of underperformance during a bull market! No normal people can stay that long simply because a book's promises. FYI I studied the capital market trend and i finally able to understand why we shouldn't follow this book at all. There are simply too many flaws in logic for individuals like me.
Anyway, you all are welcomed to try, some of you may actually be able to do pretty well, but I'm sure at the end most of us are still better off just sticking to indexing . May the force be with you.
You are going to learn about the stock market and ratios. It was very useful when I bought it 3 years ago. Since then, I realized that everything you need and want to learn is readily available for free.
However, had i followed the advise within, I'd have lost money when using their formulas. For example, one of the constants in the website from the book is Gilead. In three years since I bought this book, Gilead still not making investors money outside of the dividends provided.
The Not so Good: After reading a bunch of academic papers where investing strategies are rigorously back tested over 50-80+ year time frames I was a bit shocked to see the original version of this book listed a '17 year' back test period. Why 17 years and not 15? Why not 20 years? Why choose the back test period that has a huge long bull market (80s and 90s)? Seems a bit like curve fitting the data to me and without a good explanation from the author on why those 17 years were chosen we are left to wonder. Thankfully this updated version includes 4 'out of sample' years which start from 2005 and end in 2009 showing that the strategy seems to have held up by outperforming the S&P over that 4 year period (not each year but over the 4 years total). Furthermore, you are buying and selling 30 stocks each year this will have tax consequences (unless you are investing through an IRA or 401k) and transaction costs which were not really mentioned.
By Amazon Customer on March 18, 2020
Top reviews from other countries
Não uso muito a Formula. Gosto de fazer analises mais profundas, já que trabalho com análise fundamentalista. Mas independente disso, o livro vale a pena ser lido, principalmente para pessoas que estão começando a estudar agora.
Linguagem bem simples, fácil de entender e engraçado. Incrível perceber que Joel Greenblat entende e domina tanto do assunto a ponto de explicá-lo de maneira que uma criança conseguiria entender.