The Little Book that Beats the Market

The Little Book that Beats the Market by Joel Greenblatt. When reviewing any investment book, it is important, yet difficult, to separate one’s analysis of the proposed financial plan from that of the presentation of said plan by the author. Persuasive writing requires that one engage and draw the reader’s attention right away and Greenblatt does a fine job of this by introducing us to one of his son’s sixth grade classmates on his way to future entrepreneur glory by selling a simple product for a huge margin. He then expands this folksy anecdote into a full-fledged hypothetical situation from which he can explain several basic financial concepts and the two core components of his “magic formula” for beating the market: earnings yield and return on capital. A second tenet of persuasive writing is to get your audience inclined to your point of view ahead of time by informing them about what you’re going to tell them, then present your case, and then reinforce your arguments by telling it to them again. Up to this point (through Chapter 5), Greenblatt uses a simple writing style that will work for both beginning and advanced investors with clear summaries at the end of each section. He also successfully avoids overwhelming his audience with mathematical calculations. However, it all starts to fall apart when it comes time to proving that his formula is better than all others. The volume of numbers per page increases significantly as does the financial jargon. The writing style that was appealing early on now comes off as condescending at times. And he does a poor job of addressing another tenet of persuasive writing: anticipate your opponents’ arguments and address them completely. When presenting a plan of action in book form, there is no interactive dialog between reader and author. We can’t ask the writer to stop and expand upon a point, explain something more clearly or answer our concerns. The author must predict where his plan might be attacked and present evidence that refutes those arguments. Greenblatt barely touches on why investors should select a portfolio of thirty stocks instead of ten or fifty and he leaves it until a second, short appendix to even mention transaction costs and taxation issues. He never addresses why the two variables in his formula should have equal weighting nor under what circumstances the formula might not succeed. He also doesn’t discuss how large a stake an investor needs to have accumulated before beginning to implement this plan. As I said earlier, I point these problems out not to attack the formula itself, but to show that the presentation within those 150 pages could have been better.

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