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Book Summary of The Little Book That Beats the Market (Little Books. Big Profits ) by Joel Greenblatt

The Little Book That Beats the Market is a book by Joel Greenblatt, a successful investor and professor at Columbia Business School. The book explains a simple formula that anyone can use to invest in the stock market and beat the average returns of most professional fund managers.


The formula is based on two concepts: earnings yield and return on capital. Earnings yield is the ratio of a company's earnings to its share price, which measures how cheap or expensive the stock is. Return on capital is the ratio of a company's earnings to its invested capital, which measures how efficiently the company uses its money to generate profits.


The formula suggests that investors should buy stocks that have high earnings yield and high return on capital, which means they are both undervalued and profitable. Greenblatt calls these stocks "magic formula" stocks, and claims that they can outperform the market over the long term.


The book also provides a step-by-step guide on how to apply the formula, including how to find and rank magic formula stocks, how to diversify and rebalance the portfolio, and how to deal with taxes and emotions. The book is written in a simple and humorous style, with examples and anecdotes from Greenblatt's own experience.


The main takeaways from the book are:


- Investing in the stock market can be simple and profitable if you follow a proven formula.

- The formula is to buy stocks that have high earnings yield and high return on capital, which means they are cheap and good.

- The formula works because it exploits the market's inefficiencies and irrationalities, which create opportunities for smart investors.

- The formula requires patience and discipline, as it may not work every year or every month, but it will work over the long term.

- The formula is not a secret or a guarantee, but a tool that anyone can use to improve their chances of beating the market.

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