Joel Greenblatt, a successful hedge fund manager and professor at Columbia Business School, presents a deceptively simple yet highly effective approach to investing. In The Little Book That Still Beats the Market, Greenblatt updates his original 2005 work to demonstrate how individual investors can beat market averages using a straightforward formula based on two key metrics: earnings yield and return on capital.
At the heart of the book is Greenblatt’s “Magic Formula,” a systematic investment strategy that ranks companies based on these two metrics. Earnings yield, which reflects how cheap a stock is relative to its earnings, and return on capital, which measures how effectively a company turns investments into profits, are used to identify undervalued yet high-quality companies. Investors then buy the top-ranked companies and hold them for a year, rebalancing annually.
Greenblatt carefully dismantles the myth that beating the market requires complex strategies or insider knowledge. He uses plain language and humorous analogies to explain core financial concepts, making the book accessible to beginners. While the Magic Formula isn’t infallible year-to-year, over long periods it has delivered results that outperform most professional money managers.
Importantly, Greenblatt emphasizes discipline and emotional control. Because the strategy may underperform for months or even years at a time, it requires patience and faith in the long-term process. This is one of the most difficult aspects for investors, who often abandon a good strategy when it faces short-term turbulence.
Greenblatt also addresses common market misconceptions. He illustrates how short-term noise and investor behavior often contradict long-term fundamentals. His Magic Formula avoids market timing, relying instead on consistency and mathematical edge.
While not intended as a one-size-fits-all solution, Greenblatt’s book offers a practical, proven, and research-backed alternative to mutual funds and actively managed portfolios. The takeaway is simple but powerful: with discipline and the right formula, even ordinary investors can do better than the market.
