Hello,
is a great moment that he who is to inaugurate the first post my first blog. On this occasion, I talk about "The little book that beats the market", a book I read recently.
At first I thought was one of the many catch galore, which promise you wonders, in order to extract a few dollars ... hypothetical fortunes against hard cash. Anyway, as I like to try, even risking a few pence, I'm launching. Grand
well I can, because in less than 150 pages, in language understandable by children, Joel Greenblatt delivers a "magic formula" (extremely simple, I confirm) for investments that beat the market by taking fewer risks.
Naturally, this will shock the ins frantic effcient market theory, but the book and the author's results are very telling.
Indeed, Joel Greenblatt is not the first stranger who comes, as you can you see on Wikipedia
http://en.wikipedia.org/wiki/Joel_Greenblatt
The latter manages the 1985 to 1995 a hedge fund whose strategies are working so well, he has made investments and gains all its cleints in 1995 to only invest the money of its owners, with annual performances of nearly 40% after fees management.
Let's have the magic formula. It is extremely simple, although in a later post I will return to the difficulties of practical implementation of such a method.
Very simply, it is to buy companies in a given market, which combinentle best possible return on capital (EBIT / capital employed) and the best possible profitability (EBIT / Enterprise Value).
This amounts simply to buy the company, whose business outside leverage and taxation, is very profitable, and at the same time, are underpriced, because EBIT is a very high proportion of their value (market capitalization + debt). This corresponds generally to corporations which, because of some competitive advantage, have strong margins, and opportunities for profitable growth. This is combined here with a modest recovery: the dream of any investor.
The establishment advocated by the author:
1) Sort all the companies according to two criteria, in descending order
2) addition on the two scores for each company
3) Choose the 30 or 50 companies that scored is lowest, so the best
4) algorithm is repeated every year in early
Keep in mind that this method is for an investor resources investigations very limited who does not devote much time to invest.
The results, simulated over 17 years are breathtaking. This is simulated on the U.S. market, the largest and most liquid in the world.
If we test the method on companies whose market capitalization is more than 50 million dollars, the annualized return is 30.8%, which was soundly beats the major indices and comparable MANAGERS. If you become more selective about the size of companies, and that it sets the bar has a millaird dollars, the benefit is reduced, but remains still very impressive: more than 7% of annual outperformance.
What is very surprising, with this method is how a simple Algorithm, manages to ridicule the quasi totality of the industry Management! Naturally, the method poses some problems of implementation discussed in the next post.
can naturally question the arrangement, but it seems pretty solid.
The usual criticisms about the back tests are legitimate. Nevertheless, in the matter, the selection criterion does not favor a certain industry or certain types of values. The method outperformed the market and broadly, we studied the small or large caps. It also has the merit of approaching the so-called "value" while being more general. Finally, it is a method that takes into account the entire market, and takes into account both the health of the enterprise and its da recovery.
One might also question the sustainability of results over time. The advantage here is that the selection criteria are completely objective. In addition, they can take a step back, and select values which are those characteristics that every investor looks for when preparing to buy shares.
The questions I ask myself:
1) With the effectiveness of this method, in what time frame, a player management will be to propose a fund management has inspired this fund?
2) Is a significant number of investors would be willing to venture to follow such a method, which by its simplicity, may seem ridiculous?
3) What would this method applied to other markets?
Leave me your opinions and comments
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