The Little Book that beats the Market

[lucasrd]

Has anyone read this book or put the practices into use? It said he has annualized 30-40% returns for the past 20 years...

[jIM_Ohio]

Has anyone read this book or put the practices into use? It said he has annualized 30-40% returns for the past 20 years...

what book?

You might be able to beat market by 20-30%... I bet you could lose 50% just as easy (or even easier).

Gains like that take on risk. If you are willing to accept risk, any strategy to beat the market might be worth a try.

In order to make money in market, you must be willing to lose money as well.

[lucasrd]

the name of the book was in the title of my post: "The little book that beats the market'

[jIM_Ohio]

What strategy were they employing? Options? Commodities? Currencies?

What are you investing for?

[lucasrd]

The book basically screens out financially sound companies at bargain prices by using a calculated value of return on average assets/equity (and one other factor i can't recall off the top of my head)

It's basically companies with healthy balance sheets trading at bargain prices that have healthy returns on assets.

I have my 401K maxed, save $1500/mo in mutual funds with my financial planner, put $2K/mo into Cash./Cds, so this is basically $1k/mo I am going to put into individual stocks and am willing to assume higher risk...but by researching and picking healthy companies hope to minimize the risk and maximize returns (if you know what I mean) it's not pure speculation and I only want healthy companies....probably more of a value investing philosophy

[jIM_Ohio]

The book basically screens out financially sound companies at bargain prices by using a calculated value of return on average assets/equity (and one other factor i can't recall off the top of my head)

It's basically companies with healthy balance sheets trading at bargain prices that have healthy returns on assets.

I have my 401K maxed, save $1500/mo in mutual funds with my financial planner, put $2K/mo into Cash./Cds, so this is basically $1k/mo I am going to put into individual stocks and am willing to assume higher risk...but by researching and picking healthy companies hope to minimize the risk and maximize returns (if you know what I mean) it's not pure speculation and I only want healthy companies....probably more of a value investing philosophy

I have read studies of "services", "newsletters" and other "resources" which suggest investing techniques on Fundalarm.com The overall conclusion was the techniques being sold are "backtested", and the websites get updated if their picks do not work to picks which would have worked.

If someone has a book, more than likely they are making more from the book than they ever did from using their own techniques.

I have dabbled with investing in individual stocks (following a value approach) and not done as well... but I also sold after 5-6 years and did not hold for long term.

You pay an advisor to invest/pick mutual funds
Yet you think you can pick individual stocks?

Best of success to you. My advice is buy low, sell high.

[zetta]

I recently read this book, and one thing stood out as a red flag to me -- the author analyzed returns over the last 17 years only, which included one of the longest bull markets we've had. Other books serious investing books analyze data going back to 1926, and highlight what happens during severe bear markets periods such as 1929-1932 and 1973-1974. My other concern is that you would pay a lot of trading fees since you are making at least 60 trades per year with his system.

[lucasrd]

good point!

anyone else who has read the book care to chime in??

[jIM_Ohio]

find a way to make money in the 1970's, and use that system today.

The market was flat in the 70's... and the bull really did not fully form until Microsoft started the pc revolution in the late 80's.

Any system you use needs to be tested in flat markets, IMO.

And is the 30% return annual?

I could tell you a way to invest $100 and make $30 in 5 years. That's a 30% return, but not a 30% ANNUAL return. (130-100=30/5 years=6% average annual return).

[lucasrd]

yeah, the returns claim to be annualized

[jIM_Ohio]

They must leverage something somewhere... if anything "simple" yielded 30% returns, I'd have retired by now.

[zetta]

No leverage -- the "magic formula" simply ranks companies on return on capital and earnings yield, and has you pick the stocks that are high in both catagories. Basically you're betting that the companies that did well in both catagories the previous year will do well in the coming year. The 30.8% return quoted is an average of the return each year from 1988 to 2004 -- looks to me like it may be skewed by 3 years that were 70.6, 69.6, and 79.9, and only 1 year with a loss. It looks to me to be the average return, not the annualized return.

[disneysteve]

It said he has annualized 30-40% returns for the past 20 years...

If I found a way to get 30-40% returns consistently over 20 years, why would I waste my time writing a book and telling everyone about my secret system? I would build my fortune and retire. As always, if it sounds too good to be true...

[jIM_Ohio]

No leverage -- the "magic formula" simply ranks companies on return on capital and earnings yield, and has you pick the stocks that are high in both catagories. Basically you're betting that the companies that did well in both catagories the previous year will do well in the coming year. The 30.8% return quoted is an average of the return each year from 1988 to 2004 -- looks to me like it may be skewed by 3 years that were 70.6, 69.6, and 79.9, and only 1 year with a loss. It looks to me to be the average return, not the annualized return.

again, show me returns in a sideways market and you'll have my attention... those years (1988 to 2004) included one of the biggest bull markets in history. Rising tide lifts all the ships on top of the water (but the bad ones are still on the bottom).

[zetta]

To the OP: you've got $1k/mo that you're thinking of investing in individual stocks. If your goal right now is to learn how to pick stocks, why use a "magic formula" (as they call it in the book) instead of spending time to research individual stocks? If your goal is simplicity, why not just add it to your other mutual funds? If your goal is to accept higher risk with this portion of your money in hopes of higher returns, perhaps some of the more senior investors here can suggest which avenues to pursue?

I have noticed in EnoughWealth's blog (Enoughwealth's Personal Finance Blog- Real People, Real Finances) that he is experimenting with a portion of his money in a portfolio invested according to The Little Book that Beats the Market. I'll post a comment on his blog to invite him to weigh in on this thread.