If you’re looking for a brief and understandable introduction to the complex world of the financial markets, The Little Book That Beats the Market might be for you. Written by hedge fund veteran Joel Greenblatt partly as a way to explain what he does for a living to his five children, it’s an accessible take on stocks and the stock market. And it really is “little,” coming in at just 155 pages. You can easily start and finish this book in an afternoon.
Greenblatt walks through exactly what investors should be looking for when trying to determine if a company’s a good long-term prospect. He does a great job of breaking down the sometimes obtuse subject of accounting by using the example of a fictional chewing gum company to explain topics like inventory costs and margins. From there, he helps readers see that buying stock is more than just tracking a ticker symbol – it’s becoming a part-owner in an actual company.
Essentially, Greenblatt’s book upholds the tenets of value investing by suggesting that readers buy stock in companies that a) are currently undervalued relative to their long-term earnings potential and b) have a healthy return on capital (meaning that when the companies reinvest in their business, they’re earning a high rate of return). Greenblatt also preaches patience and long-term thinking, pointing out that there will be times the market seems to be working against you, but if you’ve done your homework, you must keep your conviction and stand firm.
The book goes further, though, by suggesting that readers follow Greenblatt’s “magic formula” to beat the market. I won’t give it all away here, but it essentially holds that by buying a certain number of companies that meet the aforementioned two criteria, and by buying and selling at the right time, you’ll dramatically outperform the market.
However, even if you’re not looking to tinker with your stock market strategy, this book still has lots to offer. Greenblatt’s suggestions for how to evaluate companies are valuable, and his insights and sense of humor make the book fun to read. His writing style is casual and conversational. This isn’t some typical stuffy finance book.
For both beginners and those with more experience, The Little Book That Beats the Market proves to be a smart investment itself. Give it an afternoon, and you’ll come away with knowledge that will pay for the cost of the book many times over.
(Originally published here: http://msbusiness.com/blog/2013/12/13/book-biz-greenblatt-worthy-fun-read-book-investing/)