Book review: The little book that beats the market by Joel Greenblatt

The little book that beats the market – Joel Greenblatt

Synopsis:
This book explains an extremely simple strategy that the author suggests will beat the market return. The author starts by telling a story of a boy who sells packs of gum. The story explains in very simple terms, how to correctly value a business. From the first chapter onwards, the author uses very simple story-telling to explain finance concepts and principles. Each chapter adds to the previous ones and becomes more complex and detailed. All this storytelling is used to give the reader an understanding of why the author’s ‘Magic Formula’ works in beating the market.
The ‘Magic Formula’ is a very simple concept in finance but the author holds that it has beaten the market returns from the past 17 years and there is little reason why it will not continue to do so. Towards the end of the book the formula is explained in detail with enough information for the average investor to apply it. The appendix is full of detailed information on the formula.

What I gained from reading this book:
I picked up this book with great scepticism. My finance lecturers told me that people cannot consistently beat the market (the Efficient Market Hypothesis). I decided to give it a read. The way the book is written is very unusual for an investment book. The best way to describe it would be that it was written for a young teenager. No jargon or excessive words. The author doesn’t take himself too seriously by adding little jokes throughout the book. All in all it was an interesting read.
With the actual ‘Magic Formula’, the author does a fantastic job in convincing the reader that the strategy is solid and will continue to give fantastic results in the future. As this book was written in late 2005, we have the ability to see how it has performed since then. After some research I have found quite a few blogs and website where people report their results using the ‘magic formula’. Some people have had poor results as it underperformed while others have held that it has been outperforming the market. At the moment I am doing my own testing but I think it is still too soon to say whether it will continue to show impressive results or not. My instincts tell me this is another ‘too good to be true’, but on the other hand, I wouldn’t be surprised if it does consistently outperform the market because of the logic behind the strategy.
I will continue to study this method and will report back if I come to any conclusion.

Positives:
Well written and easy to understand whether you have a background in finance or not. Important explanations on value, price and earnings. Very convincing explanations and results.

Negatives:
May not continue to outperform the market in the future. Seems a bit too good to be true.
Recommended for: Investors
Anybody who is interested in investing in the share market should have a read of this book. Even if you don’t choose to invest by using the method in the book, the explanations on finance concepts are easy enough for a child to grasp.

Genre: Investments

Overall rating: 8 out of 10 stars


Australians can buy the book by clicking the picture below:


Where to from here:
More detailed books on investing that I recommend are:
The four pillars of investing – William Bernstein
Five key lessons from money managers – Scott Kays

If you have read this book, feel free to give it your own rating by posting a comment below. If you have invested following this method, please let me know how it has gone for you.

What books do you read?

Hi all,

I hope you have found my reviews useful. If you have any recommendations for educational books or have read one worth mentioning, please leave a comment here on the book and your rating. It would be great to see what books you read and find useful.

More reviews to come,

Aaron

Book review: The ultimate depression survival guide by Martin Weiss

The Ultimate Depression Survival Guide: Protect your savings, boost your income and grow wealthy even in the worst of times – Martin Weiss

Synopsis:
This book takes on two tasks: to analyse the current economic situation and see why a depression is likely to happen, and to give advice on how to protect your financial position if a depression does occur. The book starts by explaining why a depression is inevitable and explains why the government won’t be able to stop it from happening. In each chapter, step by step advice is given under topics such as “how to protect your job in bad times”, “How to go for profits in a down market”.

Many of the problems in the current financial system are identified and the author strongly makes his point that things will only get worse. Many comparisons are given between the First Great Depression from 1929 and the current situation to help explain why a Second Great Depression is inevitable. The author uses notes from his father to explain what it was like in the first depression.

What I gained from reading this book:
I read this book after seeing it on Amazon and the high average rating it received from the readers. To be completely honest, I was grossly disappointed by this book from cover to cover. My instincts were telling me the whole time that the author’s points were biased and not explained objectively. The author strongly emphasises that a severe depression worse than the ‘First Great Depression’ is inevitable. While he may have good reasons to say this, everybody knows that nothing in this world is 100% certain. To say that something is inevitable raises a red flag in my mind.

Another problem I had with this book was the advice given. Basically the author says to completely remove your money from real estate, stocks and even bank deposits and hold either cash or Treasury Bills. I was shocked at this advice. Then I remembered the title of the book “depression survival guide”. If a depression does occur, the people who follow this advice will be very glad they did. What the author fails to mention is that if a depression does not occur or if the global economy starts to recover (whatever the small chance), the people who followed this advice will deeply regret it.

I like to think of the advice as betting on a horse race. Imagine betting all your money on the horse named ‘Depression’. If ‘Depression’ wins the race, you win. If another horse wins, say ‘Recovery’ or even the least likely, ‘Expansion’, you lose big time. This book is betting that the economy will tank. Remember the saying not to have all your ‘eggs in one basket’? Well this book completely ignores that advice.

I also found myself frustrated with many parts in the book where the author would exaggerate problems by using bold or italic writing and using over the top adjectives. Phrases such as ‘financial war zone’, ‘crumbling economy’, or ‘jump from the frying pan into the fire’ really demonstrate the tone of the entire book. This style of writing felt very ‘snake oil salesperson’ to me and I am left feeling very sceptical. Everything seems to be either one extreme or another. For example, in the chapter entitled ‘How to escape the housing nightmare’, the headings use words such as: mania, corruption, fraud, cover-ups, deceptions, collapse! to tell you why you should sell. An objective discussion wouldn’t use such fear provoking words. The entire book is filled with over-the-top hyperbole that I can see will do nothing but instil fear in many people. Personally, this type of writing destroyed any confidence I had in the writer and his points.

When I finished the book, the first thing I thought to myself was that in ten years, either the author will be celebrated as a visionary, or he will be forgotten like so many other people yelling that ‘the sky is falling’. At the moment, many people are convinced that the author is right on the money.
So what did I gain from this book? I gained a basic understanding on how things have become the way they are now and an idea of what I could do if a depression does occur.

Positives:
Delivers what it promises: a clear guide to ‘survive in a depression’. Very insightful explanations on the current bailouts and how the economy has come to this situation. Provides good advice for those who are worried that they will not be able to survive a depression.

Negatives:
Assumes that a depression will happen and bases the advice solely on that prediction. Uses so much hyperbole it almost sounds like listening to a salesperson make a pitch. Does not explain the risks in the advice given and takes a very biased position throughout the book.

Recommended for: People who are worried about the possibility of a depression.
If you don’t think you would be able to financially survive a depression, this book gives you advice what to do.
If you are wondering why the situation is so bad and why it could get worse, the book provides in-depth explanations. Although I really disliked this book, I know that everybody needs to consider the possibility (not inevitability) of a depression.
Just remember, although I didn’t enjoy the book, many other people did, so feel free to read the reviews by people on Amazon to gain a different perspective.

Genre: Personal finance

Overall rating: 5 out of 10 stars



Australians can buy the book by clicking the picture below:


Where to from here:
I recommend the following book that gives fantastic advice on investing:
The four pillars of investing by William Bernstein

If you have read this book, feel free to leave a comment on your thoughts.