The first time I heard about Joel Greenblatt is when a friend recommended this book a long time ago to me:
"You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits"
It is a great book about "special situations" (mergers, spinoffs, arbitrages, etc.), definitely not meant for a beginner in stock market investing. The only minor point for people interested in Asian investing is that it is 100% focused on the US market (as unfortunately the large majority of books about investing). It is written in 1985, but still relevant and I would highly recommend it, the logic presented is very compelling.
Twenty years later he followed with:
"The Little Book That Beats the Market"
It provides a rather simple formula to chose and pick shares. The returns, backtested on a reasonable large sample, looked very promising. Basically the formula choses shares with a high ROE at a relative low PE multiple. Since no formula is perfect, users of the formula are encouraged to pick about 20 to 30 different companies, to diversify the risk.
Five years later he followed this up with"
"The Little Book That Still Beats the Market"
An updated version based on the latest data.
I have to admit, I haven't read this latest book, I found the proof in his previous book compelling enough.
Also, the proof that his formula is still working can be found here, a presentation Greenblatt held at the 2009 Value Investing Congress:
The link to the presentation slides can be found here.
Quite amazing that such a simple formula is enough to beat the market, while more than half of the US fund managers are trailing the relevant index.
The Magic Formula's website can be found here.
The holdings of the "Formula Investing US Value Select A (FNSAX)" which uses the formula for its stock selection can be found here.
Big question for Asian investors: would this formula also work, say in Malaysia or Singapore? My guess is it would indeed work. But unfortunately the data to test this assumption is not readily available, like in the US.
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kcchongnz
Joel Greenblat, a well known fund manager in the US has been using his magic formula for many years in the more efficient market and earn extra-ordinary return for his fund. The magic formula just based on buying good companies (in term of ROIC) at cheap price (earnings yield), a sensible and simple concept.
Yes the magic formula bases on historical data on ROIC and earnings yield last year. Yes, there are many problems with historical data. Yes, we must be forward looking and not backward looking (forecast the future and not looking at the rear view mirror).
But why does the magic formula, basing on historical data, out-performed the market by so much? Watch the video of value investing, courtesy of Tan KW.
2013-09-23 19:01