In an interview with Forbes Joel Greenblatt discusses his book
> The Little Book That Beats the Market
and his magic formula.

Joel Greenblatt looks for cheap companies based on EBIT/ Enterprise value. This concept of cheap is inspired by Benjamin Graham.

Greenblatt also looks for quality companies. This is the qualitative concept he learned from Buffett. For quality Greenblatt looks for high returns on capital. Greenblatt believes that high returns on capital is the best measurement for finding the highest quality business.

Greenblatt for years taught his formula (cheap and quality) and believed it would outperform the market, but never conducted tests to prove it. Several years ago he looked at statistical data and it confirmed his formula.

Not only does the magic formula outperform the S&P 500, but the highest deciles of stocks in the Magic Formula outperform the lowest deciles. The stocks ranked the highest outperformed the stocks ranked the lowest within the Magic formula.

The formula has outperformed the market 72% to 5% since the book was published.

Greenblatt states that if you go through the list of stocks; there is a problem with every single one of them. Greenblatt says that since the companies are so cheap when they perform well they are able to compensate for the stocks that do not perform well.

The formula usually outperforms in both up and down markets.

Towards the end of the interview Joel Greenblatt discusses applying the magic formula towards international stocks.

Want to learn about ten of the greatest investors and their market beating strategies all in one book? John Reese and Jack Forehand recently came out with a book titled The Guru Investor that details how.<br><br>
The book details ten different investors and their formulas for beating the market. The ten investors the book discusses are Benjamin Graham, Warren Buffett, John Neff, Peter Lynch, David Dreman, Joel Greenblatt, Ken Fisher, Martin Zwieg, James O’Shaughnessy, and Joseph Piotroski.

The book clearly has a value slant towards it. While some of the investors above are not value investors, the majority are. Overall I enjoyed the book. While everyone above with the exception of Warren Buffett and Joseph Piotroski has written their own books, the authors did a good job summing up the various investors’ investment ideas.
Even though I have read many books from the investors above, I have not read most of these books recently. Reese and Forehand do a good job summing up their ideas and reminding of some of the details I had forgotten.
In addition, I have not read any books by Ken Fisher, Martin Zweig and James O’Shaughnessy. I do not really consider their investment style one I would consider incorporating. Despite this fact I still found it interesting to read about their investment approaches even if it is one I would personally not pursue.
To be honest this book would not be so useful for more experienced investors. I assume most experienced value investors have read the books by the famous value investors the book discusses. In addition while Warren Buffett has not written a book there are countless excellent books that have been written about Warren Buffett and I assume experienced investors have read these books. For more experienced value investors the best chapter is the one on Joseph Piotroski. Joseph Piotroski is a value thinker who is relatively unknown to many. Piotroski has never authored a book on value investing. However, he has back tested a value strategy that produced a 23% per annum from 1976-1996.
However, I would consider this an excellent book for a new investor. It gives a novice investor some insight into value investing from some of the greatest investors ever. The authors write in a simple fashion and explain basic investment principles that most people would understand. In addition the authors provide some useful advice about how often to re balance, when to sell and other important information that every investor must know.

To read the rest of my review on GuruFocus click here

To purchase the book on Amazon.com click on the following link The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies

Disclosure: New FTC guidelines require me to disclose I have a material connection because I received a free copy of the book to review.

Seth Klarman

Seth Klarman and Joel Greenblatt have a lot of things in common. They both are extremely successful value investors who have a long record of beating the market by wide margins. Both are widely followed in the value investing community and are very popular on GuruFocus. Both of them run large and successful hedge funds. One last similarity between the two is the both are excellent authors. Joel Greenblatt wrote two books, the more in depth of the two being titled You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits. Normally when you see the title of a book with such a pompous statement you should run in the other direction as fast as possible, however this book is accurately described by its title. Seth Klarman wrote a book nearly 20 years ago titled Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor. Both are excellent books about investing in obscure securities that are unwanted and not analyzed by others.

Joel Greenblatt and Seth Klarman have many things in common but here is where their paths diverge. Greenblatt’s book is selling on Amazon for $10 while Klarman’s is selling for $1200. For those of you who have not read Klarman’s book I will give you an outline of it. The first part of the book Seth Klarman discusses how markets are not efficient, bubbles and the difference between speculation and investing. In the second part of the book Klarman discusses investing with a margin of safety, and refutes the common myth that to get more return you need to take more risk. The third and last section of the book is where Klarman discusses how actually to find securities that have higher returns. As I mentioned in a [www.gurufocus.com] Klarman is not a classic low P/E, high dividend etc investor. He tries to look for areas with the greatest inefficiencies in the market where most institutional investors are unwilling or unable to invest. Some of these situations include spinoffs, asset sales, overcapitalizations and liquidations. Klarman provides a few examples but overall his book is scant on details.

Joel Greenblatt in his book You Can Be a Stock Market Genius writes a similiar book. He mostly skips the first two sections of Klarman’s book and focuses almost exclusively on the last section which discusses how to find value in special situations. Greenblatt touches many of the topics with a large and detailed section focusing on spin offs. Greenblatt gives many details of previous spin off situations and how to profit from them. He discusses how currently certain areas such as bankruptcies have become so crowded with sophisticated investors looking for value, that it is very hard to earn high returns in these situations.

Overall I was disappointed after reading Margin Of Safety. After expecting for months to find the famous, incredible book I finally found it. However, I was disappointed after reading it. The first two sections of the book give good advice, however any good value book such as The Intelligent Investor could be a substitute for it. The last section of the book offers good advice but is meager on detail. I think Joel Greenblatt does an excellent job filling in many of those details.

This article is no way a snipe at Klarman. He is an amazing investor and does not need approval from me regardless. I am certain he can write a book with much more examples and details of how to invest in special situations. However, my disappointment was that he did not write a book as I described. If you can get your hands on a copy of the book for a cheap price I would recommend reading it. However if you have to buy it, I recommend buying Greenblatt’s book instead, saving the $1190 and putting into your 401K.

Joel Greenblatt’s book can be found on amazon.com by following this link You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
Seth Klarman’s book can be found on amazon.com by following this link Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor