Tuesday, October 30, 2007

The Little Book That Beats the Market

I listened to several audiobooks last week when I drove across the state sightseeing. One of them was "The Little Book That Beats the Market," by Joel Greenblatt. The author describes his "magic formula" for investing that he has developed by backtesting on 17 years of data from CompuStat's Point in Time database. He openly admits that the magic formula isn't perfect and even describes how, and why, it can fail. Here's the 2 cent tour. Using a portfolio of 20 to 30 stocks and a minimum hold duration of 3 years, the book preaches the benefits of 2 simple indicators for reliably finding growth stocks: high earnings yield and high return on capital (ROC > 25%).

I didn't learn much from this book, however it was interesting to hear how the strategy was tested and retested. On the whole, I would only recommend this book to people who want to invest with little effort and who want to leave their investments in place for at least 3 years. I would not recommend it to fellow traders, like myself.

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