The Little Book That Beats the Market

Library · Investing

• Author: Joel Greenblatt
• FinSimLab rating: 4/5
• Reading: Easy
• Finance level: Intermediate
• Published: 2005

A simple formula that ranks companies by return on capital and by how cheap they trade.

What it covers

Greenblatt uses plain examples to explain his "magic formula": buy companies that combine a high return on capital with a high earnings yield, and hold them for a year. Beyond the formula, it is a clear introduction to why quality and price both matter.

What you will learn

• What return on invested capital measures.
• How to compare a company's price with its earnings.
• Why a strategy can go years without working.

Who it is for

People who want a first rules-based stock selection strategy.

Concepts

Business quality, Valuation, Stocks

What you will not learn

How to value a company in detail: the formula simplifies on purpose.

Already read a book on this?

• It shares buying good companies at good prices with The Intelligent Investor. If you have read The Intelligent Investor, this one mainly adds a simple rule to apply it. The Intelligent Investor

We suggest you continue with

• Common Stocks and Uncommon Profits (in the "I want to understand the stock market" path)

Related Academy guides

• ROIC and margins: what sets a quality company apart
• ROE explained: measuring management quality
• P/E ratio explained: how to value a stock

Put it into practice

• Stock comparison
• Company profiles
• Stock fundamental analysis

More investing books

• The Intelligent Investor
• A Random Walk Down Wall Street
• The Little Book of Common Sense Investing
• The Simple Path to Wealth
• One Up On Wall Street
• Common Stocks and Uncommon Profits
• The Most Important Thing
• The Little Book of Valuation

Descriptions written by FinSimLab for educational purposes. They do not summarise the books and are not investment advice.