Joel Greenblatt

“The best bookbook onon thethe subjectsubject in NEWin years.” years.” YORKYO — — TIMES CONTINUED FROM FRONT FLAP LE BO $19.95 USA / $23.95 CAN ITT OK BESTSEBESTSELLER L “ The Little Book [That Beats the Market ] RK The book will take readers on a step-by-step journey so $ TIMES d $ is one of the best, clearest guides to value LL that they can learn the principles of value investing in ER G In 2005, Joel Greenblatt published a book that is al- B ® investing out there.” a way that will provide them with a long-term strategy IG T S REENBLATT P F I FFinancialin Times ready considered one of the classics of fi nance litera- R O —The Wall Street Journal anc ial that they can understand and stick with through both Tim es ture. In The Little Book That Beats the Market—a New York Times good and bad periods for the stock market. Praise for bestseller with 300,000 copies in print—Greenblatt explained how investors can outperform the popular THE LITTLE BOOK THAT BEATS THE MARKET As the Wall Street Journal stated about the original edi- market averages by simply and systematically applying tion, “Mr. Greenblatt says his goal was to provide THE LITTLE BOOK THAT LITTLE BOOK THAT “Simply perfect. One of the most important investment books of the last 50 years!” $ a formula that seeks out good businesses when they are advice that, while sophisticated, could be understood —Michael Price available at bargain prices. Now, with a new Introduc- and followed by his fi ve children, ages six to fi fteen. tion and Afterword for 2010, The Little Book That Still Beats They are in luck. His Little Book is one of the best, “A landmark book—a stunningly simple and low-risk way to the Market updates and expands upon the research fi nd- clearest guides to value investing out there.” signifi cantly beat the market!” ings from the original book. Included are data and d —Michael Steinhardt, the Dean of Wall Street hedge fund managers analysis covering the recent fi nancial crisis and model performance through the end of 2009. JOEL GREENBLATT is the “This book is the fi nest simple distillation of modern value investing principles STILL founder of Gotham Capital, an invest- ever written. It should be mandatory reading for all serious investors In a straightforward and accessible style, the book ex- ment partnership that achieved 40% from the fourth grade on up.” plores the basic principles of successful stock market annualized returns for the twenty years —Professor Bruce Greenwald, Director of the Heilbrunn Center for BEATS BEATS investing and then reveals the author’s time-tested for- after its founding in 1985. He is a Graham and Dodd Investing, Columbia Business School mula that makes buying above-average companies at professor on the adjunct faculty of Columbia Business below-average prices automatic. Though the formula School, the Chief Strategist for Formula Investing, “The book unquestionably makes good on its promises.” THE has been extensively tested and is a breakthrough in the —SmartMoney the former chairman of the board of a Fortune 500 academic and professional world, Greenblatt explains company, and the author of You Can Be a Stock Market MARKET “Greenblatt delivers admirably . it contains one of the clearest, most entertaining it using sixth-grade math, plain language, and humor. Genius and The Little Book That Beats the Market. Greenblatt explanations you’ll ever see of the ideas underlying value investing.” He shows how to use his method to beat both the market holds a BS and an MBA from the Wharton School. —International Herald Tribune and professional managers by a wide margin. You’ll Jacket Design: Paul McCarthy Updated with New Introduction and Afterword also learn why success eludes almost all individual and UPDATED Ribbon Image: Michael M. Schwab / Getty Images INTRODUCTION NEW INTRODUCTION professional investors, and why the formula will con- & AFTERWORD AFTERWORD tinue to work even after everyone “knows” it. WIT H JOEL GREENBLATT While the formula may be simple, understanding why the formula works is the true key to success for investors. FOREWORD BY ANDREW TOBIAS CONTINUED ON BACK FLAP ffirs.qxd 7/30/10 2:01 PM Page ii ffirs.qxd 7/30/10 2:01 PM Page i ITTLE B E L OO TH K THAT STILL BEATS THE MARKET ffirs.qxd 7/30/10 2:01 PM Page ii ffirs.qxd 7/30/10 2:01 PM Page iii LITTLE B E OO TH K THAT STILL BEATS THE MARKET JOEL GREENBLATT John Wiley & Sons, Inc. ffirs.qxd 7/30/10 2:01 PM Page iv Copyright © 2010 by Joel Greenblatt. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or trans- mitted in any form or by any means, electronic, mechanical, photocopying, record- ing, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specif- ically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Nei- ther the publisher nor author shall be liable for any loss of profit or any other com- mercial damages, including but not limited to special, incidental, consequential, or other damages. 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ISBN 978-0-470-62415-9 (cloth); 978-0-470-92671-0 (ebk); 978-0-470-92672-7 (ebk) Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.qxd 7/30/10 2:01 PM Page v To my wonderful wife, Julie, and our five magnificent spin-offs ffirs.qxd 7/30/10 2:01 PM Page vi ftoc.qxd 7/29/10 11:19 AM Page vii Contents Acknowledgments ix Foreword by Andrew Tobias xiii Introduction to the 2010 Edition xvii Introduction to the Original Edition xxi Chapter One 1 Chapter Two 9 Chapter Three 17 Chapter Four 27 Chapter Five 39 Chapter Six 51 Chapter Seven 61 ftoc.qxd 7/29/10 11:19 AM Page viii [viii] C ONTENTS Chapter Eight 71 Chapter Nine 81 Chapter Ten 93 Chapter Eleven 105 Chapter Twelve 115 Chapter Thirteen 127 Step-by-Step Instructions 137 Afterword to the 2010 Edition 145 Appendix 165 flast.qxd 7/29/10 11:20 AM Page ix Acknowledgments I AM GRATEFUL TO THE MANY FRIENDS, colleagues, and family who have contributed to this project. In particular, special thanks are due to my partners at Gotham Capital, Rob Goldstein and John Petry. Not only are they the true coauthors of the Magic Formula study that appears in this book, but it is also a rare privilege to be associated with such brilliant, talented, and generous people. Their contributions to this book—and to the success of Gotham Capital—cannot be overstated and are appreciated more than they know. I would also like to give special thanks to Edward Ramsden at Caburn Capital for his extraordinarily insightful comments, suggestions, and editing work; to Norbert Lou at Punchcard Capital, particularly for his flast.qxd 7/29/10 11:20 AM Page x [x] ACKNOWLEDGMENTS inspiration and suggestions for Chapter 9; and to Patrick Ede at Gotham Capital for his major contributions to the Magic Formula study, for his intelligent and helpful comments, and for his editing talents. In addition, my brother, Richard Greenblatt at America Capital, deserves a major part of the credit for being my editor-at-large, for his many good ideas, for his numerous contributions to each chapter, and especially for his encouragement with this project and throughout my life. I am also grateful for the many helpful contributions and inspiration provided by Dr. Sharon Curhan (my sister, and my favorite artist), Dr. Gary Curhan, Joshua Curhan, Justin Curhan, Linda Greenblatt Gordon at Saddle Rock Partners, Michael Gordon, Bryan Binder at Caxton Asso- ciates, Dr. Susan Binder, Allan and Mickey Greenblatt (my wonderful parents), Dr. George and Cecile Teebor (the famous in-laws), Ezra Merkin at Gabriel Capital, Rod Moskowitz, John Scully, Marc Silbert, David Rabinowitz at Kirkwood Capital, Larry Balaban, Rabbi Label Lam, Eric Rosenfeld at Crescendo Partners, Robert Kushel (my broker at Smith Barney), Dan Nir at Gracie Capital, Brian Gaines at Springhouse Capital, Bruce Newberg (who got me started), Matthew Newberg, Rich Pzena at Pzena Investment Management, and Adam Barth, David Pecora, and Yury Kholondyrev at Gotham Capital.

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