The Big Secret for the Small Investor: A New Route to Long-Term Investment Success

by Joel Greenblatt

When it comes to investing in the stock market,  investors have plenty of  1.  They can do it themselves.  Trillions of dollars are invested this way.(Of course, the only problem here is that most people have no idea how to analyze and choose individual stocks.  Well, not really the only problem.  Most investors have no idea how to construct a stock portfolio, most have no idea when to buy and sell, and most have no idea how much to invest in the first place.)2.  They can give it to professionals to invest.  Trillions of dollars are invested this way.(Unfortunately  most professionals actually underperform  the market averages over time.  In fact,it may be even harder to pick good professional managers than it is to pick good individual stocks.)3.  They can invest in traditional index funds.  Trillions of dollars are also invested this way.(The problem is that investing this way is seriously flawed--and almost a of s

Genres: Finance, Business, Nonfiction, Personal Finance, Money, Economics, Audiobook

160 pages, Hardcover

First published April 1, 2011

About the author

Joel Greenblatt is an American hedge fund manager and founder of Gotham Capital. He is also an academic and a writer. He is also an adjunct professor at the Columbia University Graduate School of Business. He is the former chairman of the board of Alliant Techsystems and founder of the New York Securities Auction Corporation.

Reviews

[Jacob · Rating 3 out of 5]

This is a very readable book and it has some value, but I am giving it three stars based solely on there not being enough content to be worth printing a whole book. The book is short anyway at ~150 pages, and there's only one basic concept here that's different from Greenblatt's two previous books, You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits and The Little Book That Still Beats the Market. That concept doesn't start until over halfway through.

The concept itself is a fairly good one, motivated by Greenblatt's desire to see his books of advice make an impact on individual investors. He feels that the first book's advice was too specialized to be useful to individual investors, and the second was good for individuals but still too much work. This book is his third attempt to make an impact by recommending individuals invest in value-weighted index funds, which would derive much of the gain of the investing strategy from his second book without the individuals having to work for it. His arguments are convincing, enough so that I would check out a value-weighted index fund. If one existed. Greenblatt appears to have invented the concept (at least, he doesn't say where he got the idea) and feels they are due to become popular in the near future. His website formed to keep the reader up to date, http://valueweightedindex.com/, does not mention any in existence, but I noticed another connected web site which does appear to have some funds dedicated to Greenblatt's approach (http://formulainvesting.com/).

I must admit, Greenblatt's campy humor is still in evidence here, but it was almost worth reading the book just to see him apologize -- repeatedly -- for the title of his first book.

[Mahesh · Rating 5 out of 5]

Summary:
1.Define a criteria for cheap ness.
2.Buy a basket of stocks by following the above criteria.
3.Have the character to stick to the criteria/principles.
4. Most of the professional investors focus on short because the expectations from clients , performance is monitored monthly/quarterly and behavior of the clients when performance is below market for short time for 1-2 years.

Pages: 150

[Mark · Rating 2 out of 5]

I really couldn't find anything of value to take away from this book. I got to the end and didn't actually know what the book was about. Probably worth a re-read but that shouldn't happen surely! His other title, the Little Book that Beats the Market is a much better investment of your time.

[Fred Forbes · Rating 3 out of 5]

Not as powerful as "The Little Book That Still Beats the Market" in that much of the content is a rehash of the value proposition explained in the that book. This one is even littler . Contains information on ETFs, (exchange traded funds) missing from the first book and an interesting discussion of "value weighted" vs. "equal weighted" vs "capitalization weighted" differences that should be of interest to investors in index funds. Still, the topic is only a portion of the financial planning and asset allocation process and "do it yourselfers" will find it interesting. Picked it up as a freebie at a recent convention for investment professionals and found it worth the quick time to read.

[Kirtan · Rating 3 out of 5]

Could have just been a series of blog articles to provide the information :S

[Yousif Al Zeera · Rating 4 out of 5]

Joel has incredible way in presenting his ideas in simplified words. The book is suitable for both professionals and people with no or little background in finance/investing. He unveils his advocated approach to investing (in stocks in particular).

[Fernando · Rating 2 out of 5]

only for amateur investors is too basic

[John · Rating 3 out of 5]

Five stars, but only if his ideas turn out to be correct. Only two stars if he has misguided me. ;)

[Калоян Захариев · Rating 5 out of 5]

Със сигурност господин Грийнблат знае как да печели пари. Интересното е, че знае как да го каже на други хора по смайващо прост, разбираем и забавен начин.
Книгата е насочена към индивидуалните, дребни инвеститори, които си представят, че нямат шанс срещу големите инвестиционни акули, разбирай компании тип "Вълка от Уолстрийт". Грийнблат внимателно и методично посочва всъщност, че имаме доста добър шанс за това и описва просто методи как можем да спечелим на борсата.
Книгата ми хареса. Кратка, проста и насочена към хора без специализирани познания, но все пак с някаква инвеститорка култура.
Определено ще разгледам и останалите му книги. Струва си

[Mohammadreza Khedmati · Rating 5 out of 5]

I think the author has mastered the art of succinctly explaining investment terms and concepts. The only criticism I can make about him is that he seems to be unwilling to accept that his sense of humor is not his strongest point. ;)

[Karl Kranich · Rating 3 out of 5]

Makes a strong argument for a specific type of index investing (value-weighted), but there doesn't seem to be a mutual fund or ETF in existence that closely matches the advice given.

[Hairold Gelderkorn · Rating 3 out of 5]

Had such joy reading his 2010 book so without pause jumped from that right into this 2011 sensation. It started off nicely by admitting the shortcomings of the prior book’s “simple” yet cumbersome strategy, which I appreciated. It covered some OK concepts throughout but at times felt scattered. After some building up of passive fundamental value > passive > active, JG hits you with his big…drum roll…arbitrary +/- 10% rule, presents it without really any defense (unlike his other well-probed thoughts), then the book is over. I found that funny and abrupt.

[Jessica · Rating 3 out of 5]

A little inaccessible to people not in MBA programs or familiar with this work or who don't have enough to invest in the index funds the Author talks about.

[Robert Vlach · Rating 3 out of 5]

Zařek jsem se, že letos tady na ostrovech po roce zase překopu své Gran Canaria investiční portfolio; mám je pojmenované ponomádsku podle místa založení :-) Mj. se tu pročítám související literaturou a lepší kousky házím na blog — vzhledem ke slabé osvětě v tom vidím jistý smysl, protože jednodušší strategie nevyžadují nic víc než brokerský účet a investici v řádu nižších desetitisíců, přičemž průměrný roční výnos může být 10 % i více. Z knih pro začátečníky stále doporučuji Gladišovu klasiku Naučte se investovat. Nyní bych k ní rád přidal i právě dočtenou Greenblattovu poslední The Big Secret for the Small Investor. Oproti předchozímu bestselleru The Little Book That Still Beats the Market udělal určitý krok zpátky směrem k laickým soukromým investorům. Těm Greenblatt lépe než kdo jiný vysvětluje, proč a jak mohou porazit profesionální manažery velkých portfolií orientované na krátkodobé výsledky. Kniha je zajímavá nejen pro začátečníky. Osobně jsem si asi nejvíc odnesl z jeho rozboru tzv. value-weighted indexů, které zřejmě tvoří jeden z pilířů Greenblattem spoluvlastněných Gotham(!) fondů. Co určitě podepisuji, je jeho zásada dodržování předem zvolené strategie navzdory emocím a s respektem vůči vymezenému pásmu % podílu akcíí v osobním finančním portfoliu. Přiznávám, že více mě oslovila předchozí Greenblattova kniha, ale tuhle bych zase více doporučil začátečníkům. Ještě mám v read-listu jeho debut You Can Be a Stock Market Genius, tak pak poreferuju $-)

[Viraj · Rating 4 out of 5]

Overall: Similar to his other book "The little book that beats the market", the author spends first 50% of the book going through the basics (too repetitively though); however, for this book, the basics are too basic and can be boring. In general, the book's summary is that one could invest in the ETFs tracking indexes with market-cap-weighting, instead the equal-weighting indexes fare better. Fundamental-weighted indexes (WisdomTree and RAFI) are better. Author claims that his "value-weighted" indexes are even better. Note that the turn-overs increase, hence the costs: Market-cap: 6-8%, Equal: 16-20%, Fundamental: 10-12%, Mutual Funds: ~100%, Value-weighted: ~100%. Though the author doesn't state this, coming out of a down-turn, one may find leveraged ETFs better as they can give 2-3x returns at increased, though less than 2-3 volatility in non-sideways market. I assume that one doesn't short due to infinite loss potential. If one knows what one is doing, shorting can actually lead to bigger gains...

[Peter Voutov · Rating 5 out of 5]

I enjoyed this book quite a bit. However, I did find one issue with the author, not the book. After bashing mutual funds and managed investments throughout the book he goes on to recommend mutual funds (albeit low costs ones) and to create his own set of mutual funds that implement the strategy he recommends in the final chapter (and more thoroughly described in his other book, The Little Book that Still beats the Market). If his mutual funds become very successful (which they likely will given their history since it's inception and the tendency of people to chase the latest successful manager -- a point he makes in the book), then his strategy is bound to stop outperforming the market when his firm becomes a market maker for some of its positions. Still, this is a great read for anyone seeking to understand the complexity behind value investing.

[Rob · Rating 4 out of 5]

This book is very, very similar to The Little Book that (Still) Beats the Market. It talks about the same ideas and proposes the same fundamental index strategy for long term stock investing. It's a great book and goes into more detail than the other book, but because of that it's a little less approachable for those without much of a background in finance.

I gave this 4/5 stars because The Little Book that (Still) Beats the Market is absolutely the one that I would recommend to someone first. This is a great followup to read to hammer home some of the points and dig into the numbers a little bit, but really should be read second.

[JG · Rating 2 out of 5]

Too repetitive. Too much beating around the bushes, so much that it seems that the author just wrote enough words to make what could've been a long decent article into a wasting-time chapters.

Don't get me wrong, I admire and follow Greenblatt's work but this book could have been way shorter without missing the essential message, which is buy Value Weighted Index ETFs because they are better than market cap indexes and saves us from a lot of trouble.

I don't understand why people want to stretch so much a simple idea in order to write an entire book about it, instead of just writing a good, interesting and not-boring article.

[Thomas · Rating 3 out of 5]

The first rule to buy value + quality weighted indices has already been widely discussed by the same author in prior books.

I think the second rule to never deviate more than 10 percentage points from a fixed % of portfolio in equities is a very powerful and solid one. I made something similar for myself by instituting a cash % ceiling for myself at 20%. http://valueexpose.blogspot.be/2016/0...

[Alex Nguyen · Rating 5 out of 5]

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[Rene · Rating 2 out of 5]

Veel herhaling en het duurt erg lang voordat Greenblatt bij zijn hoofdargument komt (het boekje had evengoed een essay van 30 blz kunnen zijn). Verder redelijk leerzaam voor de beginnende belegger, maar 'The little book that still beats the market' is leerzamer.

[Ramesh Naidu · Rating 5 out of 5]

A wonderful breezy read through the thickets of the stock market

[InvestingByTheBooks.com · Rating 4 out of 5]

This is according to his own admission the book that superstar investor and Columbia business professor Joel Greenblatt always wanted to but never previously succeeded to write. I’m glad he failed twice before finally nailing it. The two beta versions turned out to be among the best investing books authored the last decade. His writing has always had the purpose of helping individual investors to succeed in the stock market. The first book You Can Be a Stock Market Genius turned out to be much too technical and mostly aided a number of hedge fund managers, the second, The Little Book That Beats the Market was definitely less complex but assumed individuals wanted to devote more time to investing than was really the case. This third book is even lighter reading but builds on the same basic concept that it is better to buy cheap stocks in good companies than expensive stocks in bad companies.

The first four chapters basically builds the story of rational investing “first figure out the value of something – and then pay a lot less”, but also the difficulty of that approach; that it’s extremely hard to know what something actually is worth as the value is derived from an uncertain future. Valuation methods like DCFs, relative valuation using multiples, acquisition value, liquidation value or sum-of-the-parts give varying and imprecise estimates of value. Yet on average it seems reasonable that a stock with higher prospective return is preferable to one with a lower and that to be attractive, the expected return should be higher than that you could get on a government bond. Then follow two chapters that discuss the merits of being a private investor compared to a professional one. The small investor can venture into areas that the professional investor with huge amounts of capital, short term performance pressures and restrictive guidelines cannot go. And as Greenblatt points out “Less competition and more choices are a real advantage”. The obvious area of advantage for the small investor is to invest in less researched small cap stocks but true to his first book the author also points to the merits of special situations investing. Realizing that small caps and special situations are suitable only for the interested few, Greenblatt in the last three chapters starts to work his way towards a more easily digested solution.

With a detour over equal weighted indexes and fundamental weighted indexes (where the later get a partial approval) Greenblatt presents the solution of A) an indexation based on the combination of the relative size of the earnings yield of the stock and of the return on capital in the companies. Basically the same market beating solution as presented in the author’s second book. Part B) consists of choosing an equity allocation in a total portfolio that you can live with and periodically rebalancing to that weight. Responsive to peoples need to feel that they can control their fate Greenblatt also allows for a narrow allocation interval for the investor to work with. This is against his better judgement but potentially hinders the investor from abandoning the whole program at the wrong time.

This is the book professional money managers should try to get their high school children to read. The book serves the authors purpose. If private investors invested like this they would probably beat the pros over the longer term. The book is very easy to read. You will complete it during a Sunday when the weather keeps you indoors. I think Greenblatt somewhat leaves the reader naked when it comes to the active asset allocation. This is an area filled with pitfalls and the risks of destroying value are high. Perhaps he could have worked more with the concept of hurdle rates (as he points to the government bond yield earlier in the book). If one would define the number of positions held, set an absolute requirement of how high earnings yield and how low ROC that would be allowed in the portfolio and then allocate to a money market fund if these rule created gaps, this could give a workable asset allocation rule. Cutting through complexity is a blessing. Most investors would be better off following these simple rules and never reading another business journal.

[Liam Polkinghorne · Rating 3 out of 5]

Greenblatt outlines a method for amateur investors to outperform professional investors.
Margin of Safety - the secret to successful investing is to figure out the value of something, and then pay a lot less. If unexpected events lower the value of our purchase or our initial valuation is mistakenly high, buying with a large margin of safety will still protect us from big losses. The estimate of value using the discounted cash flows method can change dramatically even with small changes to assumptions. Other valuation methods have similar shortcomings. Can compare our valuation to return from the risk-free rate, and other investment choices available (and our confidence in our estimates). If a company or industry is too difficult to value, slip it and find one that's easier to evaluate. You are not forced to invest in every company. Small investors don't need to compete head-to-head with professionals: can buy shares in smaller companies, focus on only those where you have a high degree of confidence in the prospects for future earnings, growth rates and new industry developments, be concentrated, special situations.
Index funds tend to outperform active managers. Because of the presence of Mr Market, market cap weighted indexes will systematically buy too much of the over-priced stocks and too little of the bargain-priced stocks. Equally weighted indexes won't do this, neither will fundamentally weighted indexes (which have some practical advantages over equally-weighted indexes, like requiring less frequency re-balancing).
Greenblatt argues we can go a step further and take advantage of Mr Market, by buying a group of stocks that the market is not willing to pay a lot for. Does this by suggesting value-weighted indexes, that systematically overweight companes where expectations are low and where there is a good possibility that an emotional Mr Market has sold the shares down to bargain levels. Focused on earnings yield and return on capital. Then have a set exposure to equities, which can fluctuate by 10% either up or down, to account for our behavioural biases and increase the chances we stick with the strategy in times of turmoil

[David · Rating 3 out of 5]

"Interesting new perspective on investing"

Valuing individual companies is hard. There are a bunch of different ways to do it. Professional investors have years of data and powerful tools to do the analysis and still cannot consistently beat the market. So what chance does the little guy have?

Institutional investors or large fund owners are usually limited to the types of companies that they can invest in. Either due to SEC rules (e.g cannot own more than 5% of a single company) or the risk to their funds if they consistently underperform. This means they tend to invest in lots of the largest companies.

One problem with traditional market weighted index funds is that if a company is overvalued you end up owning even more of it. This is usually the opposite of what investors want.

Equal weighting stocks (which I learned from a recent pitch is used by companies like Personal Capital) means frequent trading to maintain the equal weighting.

Fundamentally weighted indexes sort companies by a combination of factors like dividends, book value, earnings etc (and not market cap). This means that they don't change often and there isn't frequent trading. You could argue though that stock price (and therefore market cap) is a truer snap shot of a companies value because it is decided by investors based on every piece of information available about the company and the wider market context.

This book suggests a different approach than the usual buy and hold index investing. It proposes buying "good" companies at bargains. Good here implies that the company has had a high earnings yield in the past and has a good return on its own reinvestment (opening new locations etc). The companies have a low stock price now because their outlook in the short term is not so good. So they are on sale.

The book ends by suggesting to get access to these companies using a value-weighted index. Unfortunately the author has since closed his own fund.

Very enjoyable read nonetheless.

[Denny Troncoso · Rating 4 out of 5]

Another good stock book by Joel Greenblatt.

The big secret for the small investor
Secret to successful investing Calculate the value of something and pay a lot less

Relative Value
Acquisition value
Liquidation value
Sum of all parts many divisions one division acquisition another liquidation and another relative.

If cannot estimate future of company or industry to unpredictable. Skip it. How fast will earnings grow? What will they be? How confident are we?

Be a rebel cannot fight head on against a bigger army. Skirmish.

Small cap stocks
Below $1 billion or $500 million
Not followed by analysts or institutions
Handful 6-10 stocks

Some investors trade one stock because they know the industry in and out.

More money makes it harder to invest. Can make 50% a year on one million.

Best contributions by graham according to buffett
Margin of safety
Stock fluctuations mr market

Value weighted indexes beat all
Return on capital
High earnings yield

Smaller capitalization stocks higher mispricing up or down

20-40% long term for stock market as a 50% drop is possible.

Value investing does not work over short term

Write general principles and courage to stick to them. -Benjamin Graham

Taxable accounts etf
Long term capital gains despite short term trading
Dividends

Equally weighted etf rsp symbol 500
Fundamentally weighted etf prf sym
Value index etfs
Russell 1000 value index cheap relative to earnings
Vanguard value index
Ishares russell 1000 value index iwd
Larger stocks
Ishares russell 2000 iwn smaller stocks
Ishares russell mid cap value index iws
Ishares russell small cap value ijs
Vanguard value etf vtv
Vanguard mid cap value index vov
Vanguard Small cap index vbr
International value
Ishares Efv
Valueweightedindex.com

Pick a % of net worth to invest in stocks only adjust 10% up or down annually.

[Nomie · Rating 5 out of 5]

A few things you may have heard or read elsewhere, but he summarises them in an easy to follow format. Graham’s margin of safety (value vs price) is the main theme.

Key takeaways:
1. Index investing is inherently flawed. Market cap weighted = overweighting overpriced stocks. This is wrong from a value perspective.
2. Equally weighted index is better but costly to rebalance.
3. Big boys can’t invest in small cap companies due to certain limitations. For example, it might move the market, limit to 5% for each stock, diversification required by regulation. Safer to mirror the index (as it is their benchmark) and its performance.
4. Fundamentally weighted (e.g. revenue) beats equally weighted.
5. Value weighted (e.g. P/B) underperforms for a while but is the best over the long run. Markets fluctuate and sometimes overreact (E/P), it involves emotions of people and their expectations around prices.

[Jonathan Birnbaum · Rating 4 out of 5]

Joel is pithy and comical as always as he doles out his insights on investing. This short book focuses on the advantages of using more intelligent indices to gain market exposure. In short, the most popular market indices, like SPX500, are usually market-weighted such that you hold more of large companies, which is implicitly a momentum strategy (as companies grow you get longer). You could do better by holding an equal weight index, which requires more rebalancing but ensures you remain equally exposed to smaller names. Even better, you can weight your holdings fundamentally, by linking weights back to items such as revenue or earnings. Best would be to weight yourself by value metrics, such as his favorite earnings/ev or earnings/capital.

I'm intrigued and will likely look to rebalance away for my passive exposure from only market-weighted towards more equal weighed and fundamental (there are ETFs out there), and possibly value (his ETF is GSPY).

[Jeff · Rating 4 out of 5]

Great little book and quick read. Mr. Greenblatt writing makes for easy understanding.

Simplicity is genius- don't underestimate the book because it is not 500 pages or selling a complex strategy. In fact, I believe that the book is most helpful to people like me, who have read several dozen books on investing and personal finance.

I do admire how Mr. Greenblatt did not give up. This is the third book, describing a stock investment strategy, for the small individual investor. He discusses how even though he stands by the teachings of the first two books, that he overlooked some issues (mainly overestimating how much free time readers had to devote to investing and investor behavior preventing them from implementing the previous recommendations themselves). I've read two of these three books but now am going to go back and read the first one as well.

[Pradeep Gowda · Rating 5 out of 5]

Excllent idea for small investors

The book provides a good framework for the small investors who cannot do research on their own. It tells how valuation is a difficult task, the difficulty faced by active find managers and how they are tied up by clients measuring performance in short term, the issues with the market cap weighted index funds. It also tells about what the small investors can do different, What to do when markets fall and rise.
The book is a short one and is direct and simple.
Its written for the common small investor who doesn't know much about finance.
Over all good book.

One con from India perspective is I am not sure whether funds like he has suggested are available in India.