The Little Book That Still Beats the Market
A strategic guide to outperforming the stock market through a proven formula.
Summary of 7 Key Points
Key Points
- Understanding the ‘Magic Formula’
- Selecting stocks using earnings yield
- Evaluating companies with return on capital
- Timing the market vs. value investing
- The importance of patience in investing
- Real-world examples and historical performance
- Maintaining discipline in following the formula
key point 1 of 7
Understanding the ‘Magic Formula’
The ‘Magic Formula’ is a systematic investing strategy developed by Joel Greenblatt, aimed at determining which companies are worth investing in. Presented in a straightforward and accessible manner, the Magic Formula is designed to help individual investors outperform market averages by focusing on two main criteria: a high earnings yield and a high return on capital. Earnings yield is an indicator of how much profit you are getting for the price paid for the stock, while return on capital reveals how efficiently the company is using its assets to generate earnings…Read&Listen More
key point 2 of 7
Selecting stocks using earnings yield
Selecting stocks based on the earnings yield is a fundamental aspect of the investment strategy outlined. The earnings yield is essentially the inverse of the price-earnings (P/E) ratio. It is calculated by taking a company’s earnings per share (EPS) and dividing it by the stock price, which gives investors an idea of the return they might expect from purchasing the stock. A higher earnings yield indicates that a company is potentially undervalued or generating substantial earnings relative to its share price, making it an attractive investment proposition…Read&Listen More
key point 3 of 7
Evaluating companies with return on capital
Evaluating companies based on return on capital (ROC) is an essential aspect of the investment strategy outlined in the book. The perspective emphasizes that investors should look for companies that generate a high return on capital without using excessive leverage. This means that the company is able to make more money from its investments, compared to the cost of its capital, and is seen as an efficient use of the company’s resources. The higher the ROC, the more efficient a company is at turning its capital into profits, which is a sign of a potentially good investment…Read&Listen More
key point 4 of 7
Timing the market vs. value investing
The perspective presented in the book juxtaposes the unpredictability and risk involved in timing the market against the methodical approach of value investing. Timing the market is based on the principle of predicting stock price movements in order to buy low and sell high. However, the book emphasizes the inherent challenges in timing the market, such as the difficulty in predicting short-term market fluctuations and the emotional biases that can lead to poor decision-making. In contrast, market timing is portrayed as a speculative strategy that involves a great deal of risk and uncertainty, often depending on luck more than skill…Read&Listen More
key point 5 of 7
The importance of patience in investing
In the context of investing, the book highlights that patience is not just a virtue but a critical component for success. The philosophy underpinning this perspective is that the market’s volatility and the natural ebb and flow of stock prices can lead to short-term losses or underperformance that may test an investor’s resolve. However, by remaining patient and committed to a well-thought-out investment strategy, investors can often reap significant rewards over the long term…Read&Listen More
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Real-world examples and historical performance
The book provides several real-world examples to illustrate the effectiveness of the ‘Magic Formula,’ a stock-picking method devised by the author. This formula ranks companies based on their earnings yield and return on capital. By buying a group of these high-ranking stocks, holding them for a year, and then repeating the process, the book claims that investors can significantly outperform the market. The examples describe how even well-known companies can sometimes be undervalued by the market, presenting profitable opportunities for investors who can identify them using the formula…Read&Listen More
key point 7 of 7
Maintaining discipline in following the formula
Maintaining discipline in following the ‘magic formula’ is a central theme in the book. The formula, which is designed to help investors beat the market, emphasizes buying good companies at bargain prices. However, the author acknowledges that adhering to this systematic approach can be challenging, especially during periods when the formula seems to underperform the market. Emotional decision-making can lead to straying from the disciplined approach, which can harm long-term investment returns…Read&Listen More