Big Stock Market Tips in a Small Package.
I recently read Joel Greenblatt’s The Little Book That Beats the Market and I am quite pleased with how much information Joel was able to condense into such a small book. Written like a fairy-tale, plenty of financial heroes and villains emerge and in parables of lessons that last ages.
Actually, this book lays out a simplified view of what the stock market is and how it works, as explained by the author to his young son. For most investors, this introduction to the market will be too elementary. However, further along he gets into some basic and then more advanced principles of corporate valuation and offer a set of rules for selecting strong, fundamentally sound companies.
Later in the book, Mr. Greenblatt introduces us to his proprietary stock strategy along with a simple method for buying and selling stocks (which basically consists of buying the top ranked stocks each year based on earnings and growth and selling off the losers every year, to be replaced by a new list of top ranked stocks). His stock strategy tends to include blue chips that pay dividends such as Lockheed Martin, Time Warner, Microsoft, and Pfizer. These names may be better suited for your IRA account rather than your active day-trading account since these large-cap stocks tend to be big, solid slow movers. But that's really what this book is all about. The stocks may seem a little boring, but their strong corporate fundamentals provide some protection against risk as compared to other companies and they definitely should find a role somewhere in your diversified investment portfolio, either directly through stocks or through ETF's or mutual funds. He also provides excellent advice by recommending to hold these stocks for at least one year so you can improve your after-tax return by only paying the long-term capital gains rate.
For advanced day-traders and investors, at the end of the book Mr. Greenblatt offers a more technical explanation of how to calculate company valuation from a variety of perspectives. I recommend you read through this section and think about it for a little while as a mental exercise. If you have the time, you can even open up a blank Excel spreadsheet and plug in some of the formulas along with some company fundamentals data from Yahoo or Google. Besides the geek factor, it really helps to understand how companies operate and how important earnings are to stock values. Microsoft made how much??? Wow, look at all those zeroes.
Joel Greenblatt's The Little Book That Beats the Market offers a quick lesson in stock market valuation, bundled up in a small, easy-to-read package. The best thing about a small book like this one is that it can be quickly read by friends and loved ones, who will hopefully learn a bit about how the stock market works and become smarter investors while doing it. Since it only takes a few hours to read, I think it's also helpful to dust off this book every few years for a quick read-through. This book may be small, but it definitely gives the reader some valuable lessons for doing proper stock market research. We all know that it's easy to get caught up in the exciting hustle and bustle of different stock market trading strategies, but every now and then it pays to take a few steps back and re-consider some of the more basic principles of company valuation.
As for Joel's trading system, it is very sound. By investing in companies with low P/E's (good value) and a high return on capital (good business model), you nearly guarantee a solid fundamental basis. Overall, this book provides invaluable advice and it's easy to finish in one or two sittings.
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