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Joel Greenblatt's new book anticipation thread


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Esteemed value investor Joel Greenblatt has a new book out on Tuesday called The Big Secret for the Small Investor.

 

I have read both of Joel's other books and enjoyed them. Although the are written for the average person, they both contain very strong wisdom belied by how easily the books are read. You Can Be a Stock Market Genius presents the reader with a survey of special situations investing opportunities: spin-offs, mergers, restructurings, etc. The Little Book That Still Beats the Market was I believe the first in what has become the very successful Little Book Of investing topics, and argues that one can outperform the market, on average, simply by buying the cheapest stocks available. This book is probably most similar to Dave Dreman's writings.

 

Although Greenblatt is definitely a value investor I doubt that his new book will simply be a rehash of his first two. Anyone care to take a stab at what the "secret" will is?

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Although Greenblatt is definitely a value investor I doubt that his new book will simply be a rehash of his first two. Anyone care to take a stab at what the "secret" will is?

 

Write a book with the word "secret" in the title, and you'll make a small mint by people gullible enough to buy it.  Or tell them how simple something is, when it actually isn't.  Cheers!

 

 

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Although Greenblatt is definitely a value investor I doubt that his new book will simply be a rehash of his first two. Anyone care to take a stab at what the "secret" will is?

 

Write a book with the word "secret" in the title, and you'll make a small mint by people gullible enough to buy it.  Or tell them how simple something is, when it actually isn't.  Cheers!

 

 

+1

 

Also ad Buffett to the list of words to sell books.

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Sanjeev,

 

I agree with you but I have found these books to provide a good introduction (before reading the Intelligent Investor) to value investing.  Many in my family who are beginners liked the Little Book as it was wrtitten in a story format and easy to read.  Just my 2 cents.

 

Packer

 

 

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Hi Packer, I agree with you in that respect.  I think Peter Lynch's "Beating the Street" was a good book for novice investors as well, but it won't help them be good investors.  And that's the only distinction I was trying to make...that the easy books, just help you to continue to lose money...and I'm speaking from experience.  Lynch's book while illuminating, was completely useless from an actual investing standpoint for me personally.  Do you know how many times I had used "Buy what you know!" and then lost money?  ;D 

 

Berkshire's letters and Graham's books changed everything.  They helped create an actual intellectual framework that was completely rational, not watered down and that really worked.  While I love all these books that come out on investing, utility-wise, the originals have never been bettered.  And once the author throws in the word "secret", that usually just means a bunch of analogies or criteria, but the application remains completely elusive.  Cheers!

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The article is factually correct, but in my view misleading.  Of course, The Big Short, while probably the single best book to describe the financial crisis, also is a little misleading on this point.  Here is what I mean.  Yes, it is correct that Greenblatt pressured Burry to return his money.  The book sets this up as a David vs Goliath moment in a way.  And that is true.  The article however takes this a step further to say that while Greenblatt preaches patience, when it came time to his own money he didn't have any patience.  Not only that, but he took what could be construed as "extreme" measures to get it back implying he panicked, etc. 

 

Here is the disconnect.  Burry is one of my heroes.  In hindsight Greenblatt should have rolled with it and let Burry do what he wanted.  Remember though that Greenblatt "discovered" Burry through some early value investing chat boards.  Greenblatt invested with him and backed him as a value guy - i.e. a guy who invests in equities.  I have no idea what the documentation said, etc., but that was the gist.  All of a sudden Burry is investing in credit default swaps.  Again, Burry is a hero of mine, but why is it so unreasonable of Greenblatt to say "hey, you've lost a bit of money here and this isn't even why we invested with you"?  Maybe his tactics weren't right, but then again from all descriptions Burry basically ignored him. 

 

So getting back to the original point, it wasn't a lack of patience, but simply a change in facts (from Greenblatt's point of view).  If you invest in Fairfax and find out tomorrow they've sold off their businesses and want to become a consumer electronics retailer and have lost 15%, do you wait to see what happens?  The facts have changed and so you say while I think they are tremendous capital allocators I don't want to be in the consumer electronics business.  Has nothing to do with patience.  The article is silly.  So while in retrospect Burry was right and Greenblatt was wrong, it could have turned out the other way too.  And in any case, he has the right to at least try to get his money back when the investing parameters have changed.

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I have enjoyed reading Mr Greenblatt's books.

 

It seems that what he says or advocates for us "little folks" is not what he practices according to the following article:Plan Not To Panic at http://www.gurufocus.com/news.php?id=128519.

 

I have not read (yet) "The Big Short" but can anyone verify what was said in the article.

 

I've only had a chance to read part of the article, since I'm at work. However, one thing that struck me as unprofessional is the first paragraph. He starts off saying "Magic Formula investing site last year (by the way, Virginia, there are no magic formulas)."

 

Then links it to a site. I expected there to be a study....or something.

 

 

It linked to a page that says

 

"The idea that, with no work, an individual investor could generate average annual returns of ~30% per year (Joel Greenblatt’s initial back-tested Magic Formula numbers) was always too good to be true. There are no magic formulas, but there is a tragic equation: greed + laziness = grief.There are no magic formulas. But there is work. And there are tools to help."

 

That may be the most worthless/misleading link of anything I've ever seen in my entire life (I say that with some seriousness, too).

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Hi Packer, I agree with you in that respect.  I think Peter Lynch's "Beating the Street" was a good book for novice investors as well, but it won't help them be good investors.  And that's the only distinction I was trying to make...that the easy books, just help you to continue to lose money...and I'm speaking from experience.  Lynch's book while illuminating, was completely useless from an actual investing standpoint for me personally.  Do you know how many times I had used "Buy what you know!" and then lost money?   ;D 

 

Berkshire's letters and Graham's books changed everything.  They helped create an actual intellectual framework that was completely rational, not watered down and that really worked.  While I love all these books that come out on investing, utility-wise, the originals have never been bettered.  And once the author throws in the word "secret", that usually just means a bunch of analogies or criteria, but the application remains completely elusive.  Cheers!

 

I agree that many books for beginning value investors don't offer much when compared to the classics of Graham. For me two expections so far are  'Value Investing : From Graham to Buffet and beyond' and 'Common Stocks and Uncommon Profits' which helped me to get more intellectual framework like you call it. Now I am learning much more with (less fun) accounting books or (equally fun) behavorial finance books, no need to read ten books for beginners.

 

If you want to get all the value out of those few very good books, letters, ... just start marking, take notes, ... to get all the pieces together, that is how I am doing it now and it is starting to look like something I can actually work with.

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This small investor is on page 50 of The Big Secret. So far the secret is that valuing a company is very hard and most experts can't do it. I'm really enjoying this book so far. Of course I'm bias. It supports my thoughts that investing for the little guy does not need to be complicated nor results unsatisfactory. This is my experience over the last 25 or so years. As you all know Ben Graham wrote for the little guy too.

 

Joel Greenblatt quotes Graham on the last page of The Big Secret.

 

The main point is to have the right general principles and the character to stick to them...The thing that I have been emphasizing in my own work for the last few years has been the group approach. To try to buy groups of stocks that meet some simple criterion for being undervalued--regardless of the industry and with very little attention to the individual company...Imagine--there seems to be practically a foolproof way of getting good result out of common stock investment with a minimum of work. It seems too good to be true. But all I can tell you after 60 years of experience, it seems to stand up under any of the test that I would make up. --Ben Graham

 

Milton

 

 

 

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What are people's problem with a mechanical formula?  I agree, if you want to to have truly great returns (20%+) then looking at individual stocks is probably best, but the idea that some of you here are saying that following a mechanical formula will not beat the market (or even worse, that by following it you will lose money) is a joke.

 

I've invested REAL money (in fact all of my IRA) in the magic formula.  From when i started, in november 2007 to 4/8/2011 my total return is 20.17% VS. -6.51%. (these are TOTAL returns, not annualized)

 

Guru focus had an article earlier this year titled "which gurus had positive returns from 2008 to 2011"  I compared my performance vs. that list, and was in the top 5 (the list had at least 50 gurus). (my returns from 1/1/2008 to 1/1/2011 were 23.34%).  

 

Keep in mind, i did zero work researching these companies, and the returns were up there the best fund managers.  

 

furthermore, Ben graham himself stated in 1976 that a mechanical formula did just about as well as he did himself.

 

http://www.gurufocus.com/news.php?id=8758

 

 

beating the market IS this simple.

 

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I also just read that article mentioned above (Plan not to panic - guru focus)... In it, the guy says "by the way virginia, there is no magic formula" and then links to a website whose argument against greenblatts formula is as follows:

"There are no magic formulas.

 

The idea that, with no work, an individual investor could generate average annual returns of ~30% per year (Joel Greenblatt’s initial back-tested Magic Formula numbers) was always too good to be true.

 

There are no magic formulas, but there is a tragic equation: greed + laziness = grief.

 

There are no magic formulas. But there is work. And there are tools to help.

 

No related posts."

 

 

Does anyone care to argue against greenblatts formula and back it up with any substance?  I'm ok with criticism and critique, but i've yet to hear a valid counterpoint to greenblatts thesis that his formula will beat the market.  It seems more that we have a bunch of people who can't accept any other way to beat the market, besides doing extensive bottom up analysis

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I dont think the there is any problem with the magic formula from a technical standpoint, or any other similar systems.

 

The problem with buying stock in companies you dont understand is sticking to it when the going gets tough.  Its very hard to hold onto a company that has gone down 30%, never mind buying more, when you dont really know why you hold it in the first place.  That is why Graham's bottom up analysis works so well.  It forces you to understand how a company operates and how safe it is for the inevitable market downturn. 

 

Caught a talking head on BNN tonight for 5 minutes.  The caller asked the talking head what he should do with his Magna stock which he bought in the winter at $61, which is now at $44.00.  Talking head to his credit suggested the caller ignore the market gyrations but obviously the caller doesn't really have any idea about the stock he bought or he wouldn't have paid 61 in the first place.  That was always the problem with Greenblatt's formula.  I wonder how many got scared out of it during the financial crisis?

 

 

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Does anyone care to argue against greenblatts formula and back it up with any substance?  I'm ok with criticism and critique, but i've yet to hear a valid counterpoint to greenblatts thesis that his formula will beat the market.  It seems more that we have a bunch of people who can't accept any other way to beat the market, besides doing extensive bottom up analysis

 

Haugen (?) took a swipe at Greenblatt when the book first came out.  Basically going after the database he used and suggesting the 30% would only be ~20% or so if better data were used.  Oh, and that other formulas were better.  Mind you, don't know many that would complain about 20%. 

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The problem I have with the magic formula is it's all backwords looking and doesn't take into account:

 

1)  businesses that are going away and thus their historical returns are irrelevant (USMO for example, pre stupid acquisition)

2)  businesses that have had huge writedowns and thus their ROA isn't what it appears

 

Could there be a very simple shorthand for "beating" the market?  I guess.  But it seems like by definition, once it's discovered, it ceases to exist.  I don't believe in efficient markets but I do believe that if there is a simple stat program that could vastly outperform the market - the computers will "efficient the shit out of it". 

 

I bought Joel's new book and look forward to reading it.  I actually respect what he's trying to do.  We all get asked all the time how someone should invest and it's am impossible question to answer.  The default is usually index funds and set it and forget it and don't expect to get rich off of it.  Maybe there is something better...but I doubt it.

 

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Could there be a very simple shorthand for "beating" the market?  I guess.  But it seems like by definition, once it's discovered, it ceases to exist.  I don't believe in efficient markets but I do believe that if there is a simple stat program that could vastly outperform the market - the computers will "efficient the shit out of it". 

 

That is my problem with the magic formula also and using any type of formulas in general

 

So is the secret in his new book the value weighted index? From previewing the first few chapters on amazon he does talk about the different valuation methods and explains the time value of money very well as usual. At first I wanted to guess he was going to talk the reverse dcf and explains on finding the embedded expectations of the stock. But I guess I am wrong.

 

 

 

I bought Joel's new book and look forward to reading it.  I actually respect what he's trying to do.  We all get asked all the time how someone should invest and it's am impossible question to answer.   The default is usually index funds and set it and forget it and don't expect to get rich off of it.   Maybe there is something better...but I doubt it.

 

 

I would tell them to invest it with value oriented money managers and compile a list and hand it to them and tell them to find the one whom they can trust their capital with.

 

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I wanted to reply to a few of the comments about Graham.  Graham DID state in 1976 or so (right before his death) that a formula was the way to go.  There is a big difference between Graham in the early and middle part of his career and then at the end of his life.  He did move away from individual stock picking to more formulaic approaches. 

 

Graham was a multi-faceted individual.  Certainly he appreciated money and all the things it could do for him, but making gobs of money was not his primary objective (after of course a certain level of comfort).  It was the intellectual exercise that appealed to him.  He was involved in other disciplines as well.  Keep in mind that Graham lived a long and full life.  He didn't start really pushing the formulaic approaches (to the detriment of other approaches) until he near 80 and the end of his life.  I have always taken this as the product of an old and tired man who had seen others take a bit of his limelight away and had become a bit curmudgeonly. 

 

Unless you're Irving Kahn or Walter Schloss, how many guys want to be fighting in the trenches when they're 80?  So he wanted to stay in the game, but didn't feel like doing the nitty gritty work.  So he looks for some short cuts.  Nothing wrong with that in the least.  At that time people were starting to use some rudimentary computers and such as well.  Perhaps he felt like time had passed him by a bit.  But what I always fine amusing is when guys like Jason Zweig and John Bogle use these types of statements as support for why Graham would be in favor of index funds.  I don't believe that is the case.  In my view, it's all part of his multi-faceted intelligence.  He mastered individual stock picking and wanted to master formulaic investing as well.  Obviously he had done formulaic investing earlier with net nets, etc, but this was different.  However, it doesn't mean his earlier statements and writings become irrelevant.

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If you go on the AAII site (if you are a member), they track many value screened ideas over time.  The screens also provide a good source of ideas.  This shows how well each of the value screens works over time.  As you would expect it, the outperformance varies over time.  One interesting observation is that these screens appear to better in upswings than the market and about the same in downswings.  I wonder how much of the outperformance of value managers in downswings is due to holding cash versus equities that decline less.  I have observed the same thing with my typically 100% equity portfolio.

 

Packer 

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Packer, I am a member and have noticed the same thing.  One thing that I have always found interesting is that Piostroski screen typically kills the others.  I haven't looked in a while so don't know if that is still the case.  Whenever though I've looked at the individual names in that screen, they don't seem so wonderful.  If I was ever going to follow a mechanical investing approach blindly though, Piotroski screens always seem to do well.

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I agree they typically are not high quality names but there are few gems in these screens and they typically are small and have some hair on them.  Two that I owned from looking at names from an industry perspective are SURW and SGA.  These 2 have had a good run though.  One other I am looking at now is ACY.

 

Packer

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Definitely some gems from time to time.  I guess the point I was trying to make was similar to one I heard Greenblatt make about the magic formula.  He was essentially saying you just need to follow it since if you look at the individual names you will never invest.  Even when I've looked at individual names on a Piotroski screen from a fundamental standpoint they didn't seem so great either.  Not even talking about there being hair, etc which of course I would expect.  They just didn't seem that great.  Obviously as a whole it works out though.

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I just finished the audio book, and I must say that I am a bit disappointed. I really enjoyed Prof. Greenblatt's earlier books and was hoping that this book would add another tool to my investing tool set. Unfortunately, that was not the case. Most of the book is setup for the last couple chapters. Really, only the last 2 chapters (out of 9 total) are what comprise the "Big Secret." (Spoiler alert: The big secret is... value-weighted indexes.) I would definitely just leaf through the book in a bookstore or borrow it from the library. For most people (especially in this forum), it probably isn't worth buying.

 

Note that I have nothing against value-weighted indexes. In fact, they are probably the best no-brainer way to beat the market without any effort. I say that the book is disappointing because there really aren't any new concepts or new information in it. Fama-French (and DFA), RAFI, Wisdom Tree, etc. have been extolling the virtues of this approach for years already. I guess Prof Greenblatt's new approach is his own proprietary ranking/weighting methodology and his aggressive rebalancing.

 

The following website was setup as an adjunct to the book.

http://valueweightedindex.com/

 

And from that site you get pointed to the following.

http://www.valueweightedportfolios.com/

 

And then from there you get pointed to this site.

http://www.formulainvestingfunds.com/

 

Enjoy!

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The problem I have with the magic formula is it's all backwords looking and doesn't take into account:

 

1)  businesses that are going away and thus their historical returns are irrelevant (USMO for example, pre stupid acquisition)

2)  businesses that have had huge writedowns and thus their ROA isn't what it appears

 

So what? The whole point is that you're buying a basket of stocks. It doesn't matter what any individual stock does; it's only important how the basket performs. That's pretty much the whole point of investing in baskets/indexes/etc.

 

Could there be a very simple shorthand for "beating" the market?  I guess.  But it seems like by definition, once it's discovered, it ceases to exist.  I don't believe in efficient markets but I do believe that if there is a simple stat program that could vastly outperform the market - the computers will "efficient the shit out of it". 

 

What if beating the market over the long-term required you to underperform for periods up to 3 yrs in length? Do you still think the computers would "efficient the shit out of it?" Remember what happened to LTCM? Markets can remain irrational longer than you can remain solvent.

 

I bought Joel's new book and look forward to reading it.  I actually respect what he's trying to do.  We all get asked all the time how someone should invest and it's am impossible question to answer.   The default is usually index funds and set it and forget it and don't expect to get rich off of it.   Maybe there is something better...but I doubt it.

 

Ever heard of Dimensional Fund Advisors. They took Fama and French's research and built a massive business around it.

http://www.dfaus.com/

 

 

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