BULLS & BEARS: A small book with big ideas could be rewarding reading

December 12, 2005

Would you spend $20 and 122 minutes to dramatically enhance your net worth?

The money is for what I feel is the greatest book since 1949 on how to pick stocks. It will take you 120 minutes to read the book, and two minutes to finish this column.

In 1949, Benjamin Graham, then a 55-year-old professor at Columbia University, wrote "The Intelligent Investor."

It was a sequel to his 1934 tome on investing titled "Security Analysis," which has long been the bible of value investors.

Graham's most famous student, and the only student to receive an A+ in his class, was Warren Buffett.

Warren's roughly $40 billion has made Graham and his writings more famous 30 years after his death than they ever were in his lifetime.

Graham developed his formula for investing in deeply discounted stocks during the Depression years. Unfortunately, the formula hardly works anymore, as today almost no stocks meet his stringent value criteria.

A few weeks ago, another Columbia professor, Joel Greenblatt, came out with what I think is the greatest small, simple book on stock-picking ever published.

In it, Greenblatt shares his way of identifying stocks he has used to make himself and his clients wealthy.

He is the managing partner at Gotham Capital, a private investment partnership that has achieved 40-percent annualized returns since its launch in 1985.

Gotham's returns would have turned $10,000 into more than $4 million over the last 20 years.

Greenblatt's book is titled, "The Little Book that Beats the Market." It's an apt title, as the book measures just 7 inches by 5 inches.

Greenblatt uses the analogy of Mr. Market in his book. Imagine you are partners in a business with Mr. Market, who is subject to wild mood swings.

Each day, Mr. Market offers to buy your share of the business or sell you his share of the business at a particular price. The decision to buy, sell or do nothing is completely up to you.

Some days, he is in such a lousy mood that he names a very low price for the business, and some days he is so ecstatic that he names a high price.

In his book, Greenblatt presents a formula based on two items that identify when Mr. Market is in an exceptionally bad mood and is, in essence, willing to sell his part of the business at an incredible bargain.

The formula combines a company's "earnings yield" with its "return on capital" and ranks companies with the best of both.

He calls this his "magic formula." I know it sounds corny, but the results have been incredible.

Over the last 17 years, the 30 best magicformula stocks posted an average return of more than 30 percent per year, almost three times the market's average.

His Web site is magicformulainvesting.com. There, you can create your own list of stocks or buy the book.

It would make a nice stocking stuffer or Hanukkah gift and just might be the most profitable gift you ever give.

Gilreath is co-owner of Indianapolis-based Sheaff Brock Investment Advisors, money management firm. Views expressed are his own. He can be reached at 705-5700 or daveg@sheaffbrock.com.
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