Joel Greenblatt's Little Book
24 August '09
Once you've committed to investing, as opposed to trading, there are three ways to set about identifying companies to add to your self-managed stock portfolio:
1) Find them yourself. This method requires a high degree of familiarity with stock-screeners, as well as lines and trends within company annual and quarterly reports. It's a high risk approach for newbies and not recommended.
2) Take time proven advice. There are any number of individuals and companies selling stock advice; the trick is to find one that has a proven track record and is written in English you can understand. In my opinion the first newsletter a budding investor should sign up for is The Motley Fool's Stock Advisor. Apart from being an award winning publication it will methodically educate you on what to look for in a great investment, while handing you two stocks per month for your consideration.
3) Mechanical investing. This is the low risk approach to building a profitable portfolio, ideally used when an individual is unconcerned whether the next company they buy makes body armour or face cream. Simply explained, mechanical investing applies a formula to produce a list of companies that if bought-and-held for a fixed period will beat the general market. In choosing a mechanical investing technique one must be satisfied that it works and fully committed to sticking by the system for several years.
One such highly successful method was devised by Joel Greenblatt and explained in his acclaimed book The Little Book That Beats The Market. The beauty of the Little Book is a follows:
* It's simple
* It works
* Investment professionals cannot follow its strategy
Legendary investor Michael Price describes The Little Book as "One of the most important investment books of the last 50 years". I couldn't agree more, that's why a copy is included in all BullSense course packs.
Greenblatt's "Magic Formula" returns have been back-tested and graphed. As you'll observe, despite two of the all-time largest market crashes in the last ten years, it has returned almost 200% in the same time period. When compared to a 20% loss on the S&P500 you can see why it's called the magic formula.
