In his book – The Little Book That Still Beats The Market, Joel Greenblatt provides his three timeless investing principles. Here’s an excerpt from the book:
But here comes the big finish. Remember how I told you this chapter was going to be hard to believe? That by using just two simple tools you could actually become a “stock market master”? Well, believe it. You are a stock market master.
How? Well, as you’ll see next chapter, it turns out that if you just stick to buying good companies (ones that have a high return on capital)and to buying those companies only at bargain prices (at prices that give you a high earnings yield), you can end up systematically buying many of the good companies that crazy Mr. Market has decided to literally give away.
You can achieve investment returns that beat the pants off even the best investment professionals (including the smartest professional I know). You can beat the returns of top-notch professors and outperform every academic study ever done. In fact, you can more than double the annual returns of the stock market averages!
But there’s more. You can do it all by yourself. You can do it with low risk. You can do it without making any predictions. You can do it by following a simple formula that uses only the two basic concepts you just learned in this chapter. You can do it for the rest of your life—and you can choose to do it only after you are convinced that it really works. Hard to believe?
Well, it’s my job to prove it. Your job is to take the time to read and understand that the only reason this simple method actually works is that it makes perfect sense! But first, as always, here comes the summary:
1. Paying a bargain price when you purchase a share in a business is a good thing. One way to do this is to purchase a business that earns more relative to the price you are paying rather than less. In other words, a higher earnings yield is better than a lower one.
2. Buying a share of a good business is better than buying a share of a bad business. One way to do this is to purchase a business that can invest its own money at high rates of return rather than purchasing a business that can only invest at lower ones. In other words ,businesses that earn a high return on capital are better than businesses that earn a low return on capital.
3. Combining points 1 and 2, buying good businesses at bargain prices is the secret to making lots of money.
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