Reading books is a smart alternative to “learning by doing” and especially when you are in the business of managing money, it certainly pays making friends with top minds in the business. However, not all books are made equal and neither is our spare time infinite to peruse through most of the titles on the shelf. Being a lousy socializer has its own virtues; I get loads of time making friends with eminent dead (and alive too). This blog lists out the few investment books that I have read or intend to read and carries my recommendation (review in few cases) on the same.

This blog is also a vent for me to publish my cynical take on investing and all that crap and noise associated with it. This, however, should not imply that the idea behind the blog is to separate the chaff from wheat (I have no clue what they look like). On the contrary, the thoughts and the recommended books will only add to the already smoky scene. These thoughts however would be very sporadic and will address issues of “fundamental nature” rather than “current noises”.

Also included in the blog are links to resources which provide quality content for free (more or less). Feedback sans the four letter word f*** (and other words of similar disposition) are welcome

Legends (Book Rating)
$$$$$ - Beg, borrow or steal but do read
$$$$ - A must read
$$$ - Certainly worth your dollars and time
$$ - Charity will be a better alternative
$ - I do not read/review trash

Tuesday, July 24, 2007

The Little Book That Beats The Market




Book Title: The Little Book That Beats The Market
Author(s): Joel GreenBlatt
Rating: $$$

Review:
“Its too simple to present any challenge to the reader” said my learned colleague. No wonder why the magic formula might have worked for long. I am sure investments is the field where talent and superior performance has the lowest correlation (yours truly is truly fortunate to lack in the former). Not only this, GreenBlatt has not hesitated in puncturing egos of practitioners at the very start of his book and any analyst, having tiniest of self respect left, could not have continued to read further.

The book is all about a simple but powerful formula of stock selection. The formula incorporates two of the most critical component of any investment decision; the price one pays for the investment and the strength in the stock’s fundamentals. The former is measured by earnings yield (EBIT/EV) and the latter through Return on Capital (EBIT/ (Net Fixed Assets + Net Working Capital))

Stocks are ranked on these two criteria separately and subsequently combined to find the final ranking. Companies having the best combination are then selected as part of the portfolio. The author suggests some adjustments to EBIT. This apparently simple seeming exercise is not so simple after all, as one has to qualitative (subjective) adjust EBIT to reflect earnings in a normal year.

Even if one does believes in the author’s claims on his formula’s superior performance, one cannot ignore other important aspects of stock selection/analysis, unless ofcourse one is running a quant fund.

Go BACKTEST
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