Beating the Market (Really, I Think)

I have a few suggestions for your holiday gift list. Today’s will set you back $13.57. It is a book. Perfect for impecunious high school and college students to give their young parents.

THE LITTLE BOOK THAT BEATS THE MARKET

My friend Joel Greenblatt’s forthcoming book ranked #4,849 on Amazon Tuesday, but #1 – Holy Cow! Number One! – yesterday.

This is annoying, of course, because it all comes so easy to him. (If any of you has some terrific success, or wins a Pulitzer, I will cancel your subscription faster than you can spell-check schadenfreude or find its antonym [by which I really mean to say its converse, I think, but this is why I don’t win Pulitzers {though would, if there were a prize for parentheses.}])

Yes, I once had my name on the front of a #1 best-seller – and a #1 New York Times bestseller at that. But it was David McClintick’s Indecent Exposure, for which I had written a blurb. Which is not quite the same thing.

How does a book go from #4,849 to #1 in a day? By being favorably reviewed in the Wall Street Journal with the headline MAGIC FORMULA OF LITTLE BOOK JUST MAY WORK.

My name is on the front cover of this one, also. I wrote the foreword.

To wit (if not too witty):

The best thing about this book – from which I intend to steal liberally for the next edition of The Only Investment Guide You’ll Ever Need – is that most people won’t believe it. Or, believing it, won’t have the patience to follow its advice. That’s good, because the more people who know about a good thing, the more expensive that thing ordinarily becomes . . . bye-bye bargain.

Yet unlike most ‘systems’ meant to exploit anomalies in the market, Joel Greenblatt’s simple notion will likely retain at least a good deal of its validity even if it becomes widely followed.

I don’t want to spoil the surprise – the book is short enough as it is. My role here is simply to introduce you to the author, so you have some sense of just how far you can trust him.

I’ve known Joel for decades. He is really smart, really modest, really well intentioned and – here is the unusual part – really successful. (I mean: really successful.)

More to the point, his success has come from shrewd investing (not from selling books).

He is also funny. I read the first couple of chapters of this book to my 11-year-old nephew, Timmy, and we both enjoyed it. Timmy, with no investable funds that I know of, then fell asleep as I raced to the end, mentally rejiggering my retirement plan.

Let me tell you this much: In the beginning, there were mutual funds, and that was good. But their sales fees and expenses were way too high. Then came no-load funds, which were better. They eliminated the sales fee, but were still burdened with management fees and with the tax and transactional burden that comes from active management. Then came ‘index funds,’ which cut fees, taxes, and transaction costs to the bone. Very, very good.

What Joel would have you consider, in effect, is an index-fund-plus, where the ‘plus’ comes from including in your basket of stocks only good businesses selling at low valuations. And he has an easy way for you to find them.

Not everyone can beat the averages, of course – by definition. But my guess is that patient people who follow Joel’s advice will beat them over time. And that if millions of people should adopt this strategy (Vanguard: please hurry up and offer a low-priced fund like this), two things will happen. First, the advantage of investing this way will diminish but not disappear. Second, stock market valuations will become ever so slightly more rational, making our capital allocation process ever so slightly more efficient.

Not bad work for a skinny little book.

Now, gather ye what 11-year-olds ye may, and dive in.

While you’re waiting for the book to arrive, you can go here, for free, to have Joel’s web site build you what might be a winning portfolio. Not that I would expect anyone to change his entire investment strategy in a few minutes this morning before leaving for work. But after reading the book, and thinking about it for a while, a few of you may.