Greenblatt's Magic Formula

I just finished reading Joel Greenblatt's recently published book "The Little Book That Beats the Market." The essential idea behind Greenblatt's investment process is simple: own companies that have high earnings yields and high returns on capital. He calls this his "magic formula." In fact, there is nothing magical about his formula. It simply instructs investors to buy attractive businesses (i.e., those with high returns) at great prices. That is, of course,what all great investors do, including Warren Buffett and Charlie Munger.

While many professional investors may view Greenblatt's process as too quantitative and mechanical, I like the fact that it is disciplined and based on sound fundamental financial concepts (e.g., returns on capital and earnings yields).

If you are a day trader and you are reading this blog, you might want to do yourself a favor and pick up Greenblatt's book. You'll make a heck of a lot more money following Greenblatt's advice than you will watching CNBC and trying to trade every little wiggle in the market. Furthermore, you'll have lots of free time on your hands to read great books and acquire worldy wisdom.