Greenblatt's Little Book That Beats The Market Message Board

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Strategies & Market Trends : Greenblatt's Little Book That Beats The Market

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To: Stewart Whitman who wrote (77)	2/18/2006 12:39:44 PM
From: Shane M	Read Replies (2) of 218

Hi Stew, I went through the appendix a couple times - it was really the part of the book I was thinking he should've gotten to earlier - but still found things kindof cryptic. I'm not sure the the book mentions including non-current assets other than prop/plant/equip, but the FAQ on his site did mention certain special treatment for other assets. I don't think he really wants anyone to understand exactly what he's doing or more importantly, why this ROC calc is so good. It's written to tease imho. It's not like other books that try to teach you why something should works - or what the author specifically looks for in investments. I've been trying to think through Greenblatt's ROC calc. Why working capital (curr asset less curr liab) and net fixed asset (prop plant equip less deprec.) should comprise the denominator of an ROC calc to the exclusion of other measures is still a ? to me. I've strongly favored a return on total capital calc that includes equity and long term debt in denominator and just have a tough time understanding the advantages of ROC as measured. (In addition some of my favorite companies don't rank very well by this measure but do by other measures of efficient use of capital). I do understand what he's saying about removing goodwill. I probably should remove that from other return on capital calcs I'm currently using. I'm thinking Greenblatt's measure may be a marginal measure of capital deployment - what is the effectiveness of the marginal capital employed? Not sure though. I can get pretty close to the info on his site - the yields are no problem - but the ROC is a very large range meaning "close" is about all I can expect there. In addition to segments already mentioned, he is also excluding construction companies (homebuilders) and oil services companies which makes sense. Not sure if some of the mining companies are excluded also, but they may be also. I guess the bottom line is I want to understand better what's happening and moreso "why" he prefers the calcs. I can get a list "close enough" to his that I'm fine with it, but unless I can better understand the "why" I'm only going to use it as secondary factor in investment decisions. But I am in search of 30% returns and it seems he is onto something that only a few investors can achieve. Shane

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