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This book is fun to read, but has very little actual information. The whole book is dedicated to a single simple trading strategy. Joel's Magic Formula.
I expected a lot before reading this book but almost everything was covered in the video introduction in the website which I had watched before. I find it not really worthy buying and reading ~150 pages page by page. ok for a quick screening.
There are lots of other simple measures for testing the financial health of a company that Greenblatt completely glosses over. This book was recommended to me by an acquaintance after I mentioned that I wanted to learn more about investing. Greenblatt is overly simplistic at best and a snake oil salesman at worst.From a purely stylistic standpoint, I found the book annoyingly pedantic. I'll grant that the "magic formula" could be a useful heuristic for identifying possible value stocks, but its usefulness ends there. (On page 135, he even writes: "Step 8: Feel free to write and thank me").In sum, there are much better titles out there for beginning value investors. Greenblatt uses frequent stories about his children and fictitious business examples to illustrate major ideas.
He counsels that patience is necessary for the magic formula to work, but also suggests selling stocks every 12 months. I had high hopes from the first chapter, but came away disappointed. Furthermore, there seem to be some major contradictions in his approach to the market. I found it refreshing at first, but the metaphors wore thin after a few chapters. I couldn't help but wonder "Why not use a real business as an extended example instead of a fictitious gum company run by a child."On more substantive points, the underlying financial theory of the book is incoherent. The end of the book turned into a sales pitch for his website, which I found smug.
Christopher Browne's "The Little Book of Value Investing" (published as part of the same Wiley series) presents related ideas without annoying hyperbolic examples or the rhetorically dubious promise that one "magic formula" will beat the market.
Unlocking the market's treasures - knowing which stocks to buy and sell - is a difficult mystery seemingly beyond his powers.Joel Greenblatt is the founder and managing partner of a private investment firm called Gotham Capital. To do that, Greenblatt relies on two basic ideas - both concepts used by value- minded investors for decades. Greenblatt has added yet another tool to the investor's tool kit.It requires patience to stick with Greenblatt's idea, something else the average investor doesn't have a lot of - and that's being charitable. Market has decided to literally give away." This is a remarkable result. Yet his record speaks for itself. He's earned annualized returns of 40% since 1985.That's a truly ridiculous track record.
Basically, a $10,000 investment in 1985 comes back as nearly $12 million by the end of 2004.Greenblatt is one of the all-time greats, even though, strangely, he is not all that well known among casual investors. Certainly, his fame is nowhere near Warren Buffett's or Peter Lynch's. In some ways, the average investor is like a man looking for the right combination to get at the riches in a vault. But this is a good thing, in a way, because such underperformance will tax most investors' patience and they will abandon the formula before it really has a chance to work its magic.Review by a writer for Agora Financial, publisher of economic and financial analysis including Financial Reckoning Day Fallout: Surviving Today's Global Depression, The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble, and I.O.U.S.A.: One Nation. In The Little Book That Beats the Market, Greenblatt divulges his own magic formula - a strategy that has, over the last 17 years, returned 30.8%, versus 12.4% for the S&P 500.The basic goal of Greenblatt's screen is to find good companies at bargain prices. Greenblatt puts his screen to the thousands of stocks on the market today and ranks them, highest to lowest.As Greenblatt writes, "If you stick to buying good companies (ones that have a high return on capital) and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can end up systematically buying many of the good companies that crazy Mr. Under Stress.
Despite its clownish title, this was an important contribution to the investment literature, as it dealt with special situations - such as spinoffs - and showed how and why such investments often worked out. Since its inception in 1985, Gotham, with Greenblatt at the helm, has compiled one of the most astounding track records in the history of investing. As Greenblatt readily noted, the magic formula doesn't work every year. Clearly, here is a man worth listening to.He's already written a good book on investing titled You Can Be a Stock Market Genius. It fleshed out, and brought to a wider audience, a set of strategic options previously known only to Wall Street insiders and certain enthusiasts.Well, Greenblatt has done it again. There are times when it will lag the market. In Debt.
Just reviewing the news releases on it I learned it received a going concern qualification from its auditors which means there is substantial doubt on the part of its auditors (CPAs) that it will survive the next twelve to fifteen months. It had a loss for Q1 10, and is projecting a loss for all of 2010. To his credit he says you "may" want to eliminate any stocks with PEs under 5 as that may be due to unusual results in the prior year.Another company TRMS with a of PE 4.35 is yet another tiny little biopharmaceutical company whose revenues have plummeted from $47 million in 07 to $15.18 million in 09. Where is the return on capital.
USMO is another company that came up in yesterday's screen. Last month a court over turned five of it's patents for "obviousness." SNTA, PE 6.6 (forward PE 55)., came up in the magicformula screen. Ok so I ran his screen yesterday May 4th, 2010 and these are a few of the stocks that came up. I calculated the ROC as Greenblatt describes and yes for the past five years its generated 30% plus return on capital but that's partly because it has very little equity and till 09 had no retained earnings.
Based on this screen you buy the stocks without performing any further due diligence. Also do your due dilligence; take Greenblatt to his word and check stocks with PEs under 5. Otherwise it would have had earned close to $0 net income for 2009. Would you buy these stocks.BDSI, PE 2.2, is a tiny biopharmaceutical which showed up in yesterday's screen. The combined return of the stocks I removed due to having PEs less than 5 is -18%. And that's a 23.74% increase in yield since 5/4/10.Joel Greenblatt, a reputedly successful value investor, recommends that you run a screen off his website based on value criteria which he explains in his book.
Its revenues have dropped from $618MM in 05 to $289MM in 09. And what kind of company is this, a biopharmaceutical. A better benchmark might be something like the Vanguard Small Cap Value index which is down 12.45% over the same period. 7/9/10 Update: So how has the 5/4/2010 MF stock screen ($50 million market cap) held up through the recent market turmoil. Also don't be intimidated by the 10K. I was actually puzzled by this so I dug into its 10K. The company never had positive operating cash flow till 2009 which was due to one $20 million down mileston payment from it's marketing partner Merk. SNTA is a biopharmaceutical drug development company.
The stock has lost half its value since 2005, pretty much in line with its drop in revenue from $618 million to $289 million. One other problem is that Greenblatt advises buying the top ranked 5 to 7 stocks, except that his screen does not provide their rankings. It looks like most of its 09 income came from a $12 million reverse termination fee paid to for a termination agreement with Arigene Co, Ltd. Also currently the combined earnings yield for this portfolio is 10.53% (based on TTM earnings). It has perennially underperformed the NASDAQ despite the impressive ROCs throughout.SNTS another company that came up in yesterdays screen is running an accumulated deficit; meaning to date it has only consumed investor's capital, let alone provide any return on it.
Only three stocks are posting postive returns + 4.3% combined. In fact it looks like it's only ever had one positive quarter ever and is voraciously chewing up capital through its R&D line. Yes, this has a PE of less than 4 but Greenblatt made eliminating these optional. In addition Greenblatt is pushing visitors to his site towards his forumlainvesting funds. You are not diversified, even if you own 30 stocks, if a good portion of them are in one sector. Based on 5/4/10 opening prices you would be down -16.3% versus -8.81% for the S&P500 (cap weighted).
Why is this showing up in Greenblatt's screen.If you just ran this screen and decided to buy all 30 stocks, you would be overweight in biotech which is a very risky sector and which is well known for letting investors down. How is this a magicformula stock. I'm wondering if this was part of his grand design from the beginning. Still you have to wonder about a company that can't generate retained earnings. Finance rather than the Sales and Ops teams seems more responsible for generating the impressive ROCs. That's 3.48 times the return on a 10 Yr Treasury note currently yielding 3.03%. These are easily accessible.
It's still selling at nearly 2X book value. In 07 and 08 it declared a net loss but rather than reporting a retained deficit, they reclassified the net loss through the statement of stock holders' equity against APIC, which partly explains why APIC (the additional equity/capital paid in by investors)has been shrinking, although it's also explained by the share repurchase program, which is a positive. You can learn a surprising amount just by reviewing recent news releases. He's a billionaire for reason.The list of stocks in the May 4th screen (Market caps greater than or equal to $50 million) : OSKSNTSPPDSMEDIMMUUISCEUONTYTTTUNTDDLXPRSCEMECNUUEPSWTWAMEDSOLRLOCHKEVSNTAPOLABCJCOMSVACBPOI removed those stocks with PEs less than equal to 5.
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