What is The Little Book That Still Beats the Market about?

The Little Book That Still Beats the Market is Joel Greenblatt's attempt to distill value investing into a two-variable formula that any individual investor can run. First published in 2005 and updated in 2010, the book introduces what Greenblatt calls the "magic formula": rank all stocks simultaneously by earnings yield (a measure of cheapness) and return on capital (a measure of quality), then buy the stocks that rank highest on both metrics combined. Hold them for one year, sell, and repeat.

The underlying logic is straightforward. Earnings yield is the inverse of price-to-earnings and measures how cheap a stock is relative to its earnings power. Return on capital measures how efficiently a business converts investment into profit. Greenblatt argues that buying cheap stocks with high returns on capital will, on average, outperform the market over time because other investors systematically undervalue good businesses when they are temporarily out of favor. The formula is not designed to eliminate bad years — it can underperform for two or three years in a row — but the back-tested long-run track record shows meaningful outperformance over the full period Greenblatt examined.

The book is deliberately simple. Greenblatt wrote it to be accessible to his children; the first half explains the concept of buying good businesses at cheap prices, and the second half explains the mechanical formula and how to implement it. The prose is clear and the examples are concrete. This accessibility is both the book's strength and its limitation — readers looking for nuance in how the formula handles different industries, how it degrades when it becomes widely followed, or what the tax implications of annual turnover are will need to look elsewhere.

The honest caveat Greenblatt himself makes is that the formula requires discipline. The years when it underperforms are the years when investors are most tempted to abandon it. Sticking with a systematic approach through periods of underperformance is harder than it sounds — which is why most investors who try the formula eventually deviate from it at the worst possible moment.