The Little Book that Beats the Market: 5 Important Takeaways | Motilal Oswal

The Little Book that Beats the Market

The problem with most investors who wish to trade and invest in the share market today is that they don’t spend enough time doing their share-related work beforehand. Instead, they tend to rely on market sentiment and the thoughts of fellow-shareholders and investors before they invest. Decision-making, as far as stocks are concerned, has to be based on concrete factors that are reliable. Many investors dive headlong into the stock market without a thought about the consequences of their actions. 

There is nothing wrong with enthusiasm and the positivity that comes with it, but delving into an unknown territory, especially if you are a novice, can propel you into a dark pit of loss. Doing your homework, however cliched it may sound, as far as the stock market today is concerned, will leave you richer in spirit and in your purse. As Joel Greenblatt, renowned investor-teacher and share market expert states in his book, “The Little Book that Beats the Market”, “choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match.” He goes on to say that you may live through the experience, but that doesn’t make you less of an idiot to have attempted it. 

Learn from the Best

The world of online trading and investing in the stock market is not for the faint of heart. Yes, you may be a risk-taker, and you may be very confident. However, the risks you take should be the result of calculation and fundamental analysis and not just due to a feeling in your gut. The stock market is the worst place for investors who rely on their feelings rather than logical reasoning. The experts know this, and even they make errors of judgement at the best of times. When you first open a Demat account, you may be very excited to rush in and trade. Nonetheless, doing a bit of study before you execute your first trade is a necessary condition of investment. Reading books like “The Little Book that Beats the Market” is a great way to begin your investing adventure. 

The Author Knows Best

Joel Greenblatt is the author of “The Little Book that Beats the Market”. He is an American hedge fund manager, investor and avid writer. In 1985, he created a company, ‘Gowtham Capital’, and has experienced considerable success over time. When his book was initially published in 2005, it achieved quick international acclaim, with analysts and newcomers alike. The simplicity of the written word and a compelling style of storytelling is what sets this book apart from other ‘stock market bibles’. To be sure, once you start reading it, you will not only want to invest in the share market today, but also automatically learn the lessons that are taught by the book. 

Little Book, Big Lessons

With very sensible insights that stress more on the common sense of investing, this small book, with large lessons, can change the way you approach the stock market today. Strategies that are easy to understand are touched upon, as well as overall suggestions to invest in bargain stocks. Greenblatt is right on the money with his ‘magic formula’ which the author has written about in a way that even his children can grasp. Here are five key lessons you can learn from a tiny book with a huge message: 

  1.  The Magic Formula - All the lessons in the book are based on one formula that leads to successful investing. This ‘magic formula’ includes a strategy that can raise your chances of outperformance in the stock market. So, the first lesson you learn from the book is that you CAN outperform the share market. Now let’s get to the ‘how’ of it.
  2. The Companies to Invest In - Greenblatt tells the reader and investor how to approach value investing in primarily large-cap stocks. Screening companies based on specific criteria, such as their profits compared to losses helps you to know which are ‘good’ to invest in. Greenblatt recommends investing in companies that are ranked, based on their earnings apart from taxes and interest, their yield as computed by EPS (earnings per share) divided by the present price of the stock, and companies’ return on capital. 
  3. Be Unemotional - The author uses a strategy that has no room for intuition or feelings. He suggests that you should, as an investor, be an unemotional person, at least while you are investing and involved in online trading. The main thing to be is systematic and methodical in your approach. 
  4. Get Rid of Losers - The investors who pay heed to Greenblatt’s book will learn that investors have to sell stocks that appear to be losing momentum within a year of holding them. Written from the point of view of the American markets, this strategy helps investors to make the most of an income tax provision to use any losses for the purpose of offsetting gains. 
  5. Buy Cheap - Buying stocks at cheap prices, on average, can yield good returns if held for the long term. For instance, while screening a new company whose stocks you may want to invest in, you may find the stock price low as the company is just getting a promising foothold. Such a stock is great to buy, as it can probably only rise with the company’s success. 

More Lessons 

There are more than just five lessons to learn from Greenblatt’s book. The author recommends, when you invest in the share market today, that you should not include any financial or utility company stocks to buy. With a long-term view to purchasing stocks, the author states that each year, investors must rebalance portfolios, selling off losing stocks before the end of the year, and winners after the beginning of the next year. 

Moreover, buying just two to three positions every month, in top-notch companies, over a year’s course, stabilises your investment. Finally, a key takeaway from the book that almost wills you to listen to it, is that you should be an investor for the long haul, repeating your miraculous formula for at least 5 to 10 years. The moment you open a Demat account, you are on your way to becoming a success at investing, if you pay heed to Greenblatt’s unbeatable advice.

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