Tuesday, January 03, 2006

Another review of Greenblatt's Little Book

Here is another review (accept the “terms of use” statement to get to the review) of Greenblatt’s “Little Book that Beats the Market. Tom Brown’s bankstocks.com is a highly entertaining and generally useful view of financial services stocks especially some of the larger market capitalization names.

Tom is willing to take a stand on some rather controversial names both on the long and short sides of various names. He has been particularly strong in his criticism of Bank of America’s accounting and Ken Lewis their CEO. He has also been very forceful in his positive arguments about First Marblehead and education lenders. I find his writing very incisive and thought provoking.

The review of “the magic formula” confirms some of the thoughts that we have shared earlier…the approach essentially emulates Buffett”s and Munger’s approach to buying high quality businesses at discount prices. The issue of competitive advantage period is avoided by having a one-year holding period.

As Matt Stichnoth, Tom Brown’s associate and partner outlines in this review: “Greenblatt stresses a point too often overlooked in how-to investment manuals: true value investing can be extremely psychologically debilitating. The value maven, after all, buys stocks everyone else hates, and then holds them for years, until the stocks return to favor. The key word in the foregoing sentence is years. The names that Greenblatt’s formula turns up can take up to three years or more to generate meaningful returns.”

Value investing is logical and disciplined but unfortunately, completely contrary to the “ready, shoot, aim” mentality that most “investors” exhibit. The need to “do something” or to react to “information” is sadly lacking in most of us.

This is why we try to focus on fundamentals, rather than noise…to separate facts from opinion. The efforts of Wall Street are there to maximize their net worth, NOT yours.


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