The Little Book that Beats the Market

Here’s the official video you’re asking about:

“The Little Book that Beats the Market | Joel Greenblatt | Talks at Google”

This is Joel Greenblatt’s Talks at Google presentation (from 2017), where he discusses the ideas in his best-selling investing book The Little Book That Beats the Market and the principles behind his “magic formula” approach to stock investing. (Glasp)

📌 What He Covers in the Talk

• How the stock market really works: Greenblatt explains that prices don’t always reflect true business value and that market swings often create opportunities for disciplined investors. (Filmot)

• Why most people should index: He agrees with the view that index funds are suitable for most, yet also notes that he personally uses a different approach. (Filmot)

• The idea behind his “magic formula”: A simple, rules-based investing strategy focused on finding undervalued but high-quality businesses by combining measures of cheapness with high returns on capital. (Glasp)

• Behavioral lessons: He emphasizes patience and sticking with a strategy even when short-term results are volatile. (Glasp)

📘 The Little Book That Beats the Market — The “Magic Formula” Explained

👤 By Joel Greenblatt

Greenblatt’s Magic Formula is a simple, rules-based investing strategy designed to outperform the market over the long term by buying:

Good companies at bargain prices

It removes emotion and replaces it with a disciplined system.

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🧠 The Core Idea

The Magic Formula ranks stocks using just two factors:

1️⃣ Earnings Yield (Cheapness)

• Measures how inexpensive a stock is relative to its earnings.

• Think of it as: “How much profit am I getting for the price I’m paying?”

• Higher earnings yield = cheaper stock.

Formula (simplified):

Earnings Yield = EBIT ÷ Enterprise Value

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2️⃣ Return on Capital (Quality)

• Measures how efficiently a company uses its capital to generate profits.

• High return on capital = strong business model.

Formula (simplified):

Return on Capital = EBIT ÷ (Net Working Capital + Net Fixed Assets)

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🔢 How the Magic Formula Works (Step-by-Step)

1. Rank all eligible companies by Earnings Yield (highest = best rank).

2. Rank them again by Return on Capital (highest = best rank).

3. Add the two rankings together.

4. Buy the top 20–30 companies with the best combined rankings.

5. Hold for one year, then rebalance.

6. Repeat consistently for years.

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📊 Why It Works

Greenblatt’s logic:

• The market often misprices companies.

• Investors overreact emotionally.

• A mechanical system exploits this irrational behavior.

• Over time, buying good businesses when they’re temporarily unpopular produces strong returns.

He emphasizes:

The formula doesn’t work every year — but it works over time.

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⚖️ Key Principles Behind It

• ✔ Discipline beats emotion

• ✔ Simplicity beats complexity

• ✔ Process beats prediction

• ✔ Patience beats timing

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⚠️ Important Caveats

Greenblatt himself says:

• Most people are better off using index funds.

• The strategy requires sticking with it during underperformance.

• It may underperform for 1–3 years at times.

Behavior is the hardest part.

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💡 In Plain English

The Magic Formula asks two questions:

1. Is this business high quality?

2. Is it cheap right now?

If both are true — buy it.

Repeat consistently.

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