THE LITTLE BOOK THAT BEATS THE MARKET
Hubert Heller: ‘I bought The Little Book that Beats the Market on your recommendation and I can see two main problems with the approach: 1. Trading costs. To buy and sell 30 stocks every year costs $237 per year at foliofn.com. That’s 2.4% a year of $10,000 invested – a big expense drag, especially if the system doesn’t outperform by as much as it claims to. 2. Backtesting. Most backtested stock market systems don’t work in the forward direction for very long (e.g. Motley Fool’s Foolish Four model). Any thoughts?’
1. Trading costs: To buy and sell 30 stocks every year costs $237 per year at foliofn.com. That’s 2.4% a year of $10,000 invested.
Wait till you’ve accumulated $20,000? Start with 15 stocks instead of 30?
2. Backtesting. Most backtested stock market systems don’t work in the forward direction for very long (e.g. Motley Fool’s Foolish Four model).
Right you are. I spent two whole chapters of one of my books (long out of print) making fun of stock market ‘systems,’ the sillier they were, the better. (Why should there be any forward correlation between the winning league in the Super Bowl and the direction of the stock market?) But Greenblatt’s system is grounded in the thought that, over time, the stocks of intrinsically good businesses selling at low valuations will do better than the stocks of intrinsically bad businesses selling at high valuations. To me, that makes a lot more sense than investing in stocks whose symbols begin with P (even though I’ve had good results with P’s in the past).
So then the question is: how can you tell if a business is ‘intrinsically good’ (and, even if it is, that it will continue to be)? And to me, the Joel’s answers are persuasive.
What’s more, unlike the Foolish Four, this system is not likely to be self-defeating. With the Four (if I recall right: buying the second through fifth highest-yielding of the 30 Dow stocks at the beginning of each year), it became so widely followed that the price you had to pay for those four stocks went up, making them less good buys. Greenblatt’s method is spread out over a great many more stocks . . . and in the event it did become a widely adopted investing strategy, it would be somewhat self-defeating – but in a positive way: it would tend to give good businesses higher valuations and less good businesses lower ones, thus improving the rational allocation of capital – which is good for the economy.
Hank Porter: ‘I actually had a couple classes with Dr. deHaven-Smith for my master’s program. He’s no partisan. He and I talked about many of these issues 3-4 years ago, and I say, ignore him at your own peril. He’s the leading political scientist specializing on Florida. I’m glad to know his book is out. I’ll buy it today.’
☞ Not everyone should spend $75 on that book, but everyone who cares about his country – Dem and Rep alike – really should take a few minutes to read the interview.
Pete Costello: ‘Thank you for directing us to that insightful interview. Also check out Future of Freedom by Fareed Zakaria.’
☞ From Publisher’s Weekly: ‘. . . Zakaria contends that something has also gone wrong with democracy in America, which has descended into ‘a simple-minded populism that values popularity and openness.’ The solution, Zakaria says, is more appointed bodies, like the World Trade Organization and the U.S. Supreme Court, which are effective precisely because they are insulated from political pressures. Zakaria provides a much-needed intellectual framework for many current foreign policy dilemmas, arguing that the United States should support a liberalizing dictator like Pakistan’s Pervez Musharraf, be wary of an elected “thug” like Venezuela’s Hugo Chavez and take care to remake Afghanistan and Iraq into societies that are not merely democratic but free.’
I’d vote for Zakaria for almost anything. But in the meantime: if you missed it Friday, do try to find a few minutes to read the deHaven-Smith interview.
It’s about more than just perverted election results, but that’s no small thing itself. If we can’t trust our own elections, as the Government Accountability Office essentially concluded we couldn’t (see, also, yesterday‘s column), we have a problem both teams should want to fix – fast.
Quote of the Day
Money may be the husk of many things but not the kernel. It brings you food, but not appetite; medicine, but not health; acquaintance, but not friends; servants, but not loyalty; days of joy, but not peace or happiness.~Henrik Ibsen
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