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Strategies & Market Trends : Greenblatt's Little Book That Beats The Market -- Ignore unavailable to you. Want to Upgrade?

To: LauA who wrote (10)	12/13/2005 4:23:02 PM
From: Paul Senior	Respond to of 218

Yes, I forgot about that first book. You are saying given the first book ("You Can be a Stock Market Genius"), a least a couple of methods are employed by Greenblatt. We are left with the same conclusions, imo. The good results - assuming one believes what is bandied about - 40% - , are the result of at least two different methodologies. That is not explained in the interview or the hoopla that I see surrounding the second book. Secondly, either of the methods seems like it would be very good. From the first book, p.57, "If the past experience of these studies holds true in the future, spectacular results could be be achieved merely by buying a portfolio of recently spun-off companies. Translation: 20-percent annual returns - no special talents or utensils required." Greenblatt notes that the good results are achieved in the second year. I see the methods of the current book as a relative value exercise also. I envision a 2x2 matrix (4 quadrants). What he's saying is pick stocks from the quadrant of low pe (actually 1/pe) and of high returns on invested capital. Given that 30 stocks are chosen over a timeframe and are re-evaluated every year, the short-term danger is that the year might be one in which stocks are high in general - resulting in generally high pe's. Buying mostly 30 of anything in such a year could be dangerous. (Again, the way I look at it is that the entire matrix is shifting - average returns on invested capital sometimes fluctuate too, e.g the current great profits from refiners.) There is a way around that which is to generate a numerical relationships among the variables - p/e, ROIC, etc. You then buy a stock which meets a specific numerical number. You don't buy haphazardly or judgmentally from within a shifting quadrant. Such a formula can be developed -- I did it, and I sometimes use it selecting stocks. Somehow though -gg-, I don't seem to get the tremendously outstanding results.