Top positive review
A Small Book with a Big Message.
Reviewed in the United States 🇺🇸 on April 12, 2011
This is a very good book for its intended audience. First, it is short and sweet. At about 156 pages it may seem not so short, but the book is quite small in size, and it probably amounts to, say, 100 normal sized pages. Second, author Joel Greenblatt doesn't simply present his suggested approach for small investors. Rather, he first takes the reader through many of the common investing alternatives that ultimately prove to be too hard, too confusing or just too simplistic for small investors to successfully implement. There's a lot of value in knowing the limits of common investing approaches.
Interestingly, this is not Greenblatt's first book on investing. He has already written "You Can Be a Stock Market Genius," which he now says assumed too much specialized knowledge on the part of readers. It also assumed that small investors have lots (and lots) of time to devote to their investments. Greenblatt claims the book helped a number of hedge fund managers, but they weren't necessarily the target audience. His other book, "The Little Book That Beats the Market," was (and still is) good advice, he maintains, but again most people don't want to do all the necessary work themselves. So, "The Big Secret for the Small Investor" represents his third attempt. Is the third time a charm? At a minimum, I'd say he's much closer. Indeed, for many readers this will prove to be the right mixture of content and sensible advice.
Greenblatt basically groups the small investor's options to four possibilities:
(1) Do it (invest) yourself. However, this is hard. Really hard, to judge from the collective experiences of millions of investors. Many people have little idea as to how to analyze companies and select individual stocks. Further, many do not know how to construct a stock portfolio or know when to buy and sell.
(2) Turn your investments over to a pro. The trouble is that most pros underperform the S&P 500 over the long run. Sure, there are some great pros, but finding them may prove to be at least as hard as successfully investing on your own. In my view, this is a very important point that Greenblatt makes. It's just not as simple as finding the pro with the best track record for the last one, five or ten years. What worked in the past may not work so well in the future. This observation, by itself, could be worth the cost of the book for some investors.
(3) Invest in index funds. However, there are problems with index investing, and congratulations to Greenblatt for developing and explaining these problems in terms that most investors understand. As you read this book, you will come to appreciate the difference between market-weighted ("capitalization" weighted) funds, equally-weighted funds and "fundamentally-weighted" funds. The differences are not trivial, yet most investors are unaware of them.
(4) Use Greenblatt's approach, developed and explained in this book. In fairness to the author, I should let his book speak for itself. However, I will say that his "value-weighted" approach, which amounts to giving more weight to investments that appear more attractively priced (lower price/earnings ratios, etc.), makes sense for many investors.
I have personally invested for many years, and as I look back on my own investing experience I could list many ideas that sounded good to me at the start, but proved to be too complex or too theoretical to work well in the real world. The beauty of this book is that you can save yourself a lot of time by reading Greenblatt's assessments of the typical theoretical approaches and their limitations. For example, financial theory tells us that the value of a company is equal to the value of its future earnings, "discounted" back to today's dollars. The theory is absolutely correct in many respects, but if you try it you'll quickly find out that relatively minor differences in assumed future growth rates (or other variables) make for large differences in today's "value." So what good does that do? As far as traditional Benjamin Graham value analysis goes, the way to succeed is to first determine the value of a company and then to be sure to pay a lot less for it. The "lot less" amounts to Graham's "margin of safety." That's fine for Warren Buffett, who is a master at assessing a company's value. But how are most people going to accurately value a company? They're not. Too many important estimates or guesses are involved.
Okay, this is getting long, so I will draw it to a close. This is an easy to read book that will appeal to (and help) many small investors. It helps identify those approaches that won't work for most people (and in my view, that's perhaps half of the value of the book), and it describes a realistic approach that most people can use. There are no guarantees in investing, of course, so your mileage may vary. At the end of the day, however, this is a worthwhile book for small investors to read. It's well worth your consideration.