I just read the “The little book that beats the market” by Joel Greenblat and wanted to see if anyone in this sub is employeeing or has employeed the investment strategy suggested in the book.
The idea stipulated is quite simple: “buy good companies at a bargain”. While the logic seems sound the execution suggested is even simpler which I will try to summarize below for anyone who is interested.
The main point of this strategy is that it only works if applied in a long period of time, aka 5 years +. The author presents a case that this strategy has consistently beaten the average market results for the past 17 years and thinking about the logic he is employeeing it sounds rational.
The main caveat for me is the application of the formula and how consistent one can be when applying it to actual numbers, so that's why I wanted to ask if anyone around here has read/used/is using the suggested method and what are your thoughts.
Also if you have used the method what were the sources you employed did you do your own research or did you use sources presented in the book.
Here is a brief summary of the strategy:
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Look for good comapnies by selecting businesses with a high return on capital, the simple formula here is EBIT/(net working capital + net fixed assets).
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Look for businesses with a high earning yield, the simple formula here is EBIT/EV (enterprise value).
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Rank potential companies according to these two criteria, add those critiria to recieve your final ranking and select the best 20 – 30 companies. Hold them for a year, afterwords sell and repeat.
That's pretty much it. I did cut some corners to briefly explain the idea of course, the book goes into slighlty more detail and gives an explanation to why theses specific inputs are used, but nevertheless the idea stands: good companies at a bargain.
Once more I'd love to hear your thoughts.
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