The Little Book

That Beats the Market

Joel Greenblatt

John Wiley & Sons, Inc.

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The Little Book

That Beats the Market

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The Little Book

That Beats the Market

Joel Greenblatt

John Wiley & Sons, Inc.

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Copyright 2006 by Joel Greenblatt. All rights reserved

Published by John Wiley & Sons, Inc., Hoboken, New JerseyPublished 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 the1976 United States Copyright Act, without either the prior written permission ofthe Publisher, or authorization through payment of the appropriate per-copy fee tothe 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. Requeststo 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 usedtheir best efforts in preparing this book, they make no representations or warrantieswith 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 particularpurpose. No warranty may be created or extended by sales representatives or writ-ten sales materials. The advice and strategies contained herein may not be suitablefor 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, orother damages.

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ISBN-13 978-0-471-73306-5ISBN-10 0-471-73306-7

Printed in the United States of America

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www.wiley.com

To my wonderful wife, Julie, and our five magnificent spin-offs

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Contents

Acknowledgments ixForeword by Andrew Tobias xiiiIntroduction xvii

Chapter One 1Chapter Two 8Chapter Three 16Chapter Four 26Chapter Five 37Chapter Six 48Chapter Seven 58Chapter Eight 67Chapter Nine 77Chapter Ten 88

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Chapter Eleven 100Chapter Twelve 110Chapter Thirteen 121

Step-by-Step Instructions 131Appendix 137

[ v i i i ] C O N T E N TS

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Acknowledgments

I am grateful to the many friends, colleagues, and familywho have contributed to this project. In particular, specialthanks are due to my partners at Gotham Capital, RobGoldstein and John Petry. Not only are they the truecoauthors of the Magic Formula study that appears in thisbook, but it is also a rare privilege to be associated withsuch brilliant, talented, and generous people. Their con-tributions to this bookand to the success of GothamCapitalcannot be overstated and are appreciated morethan they know. I would also like to give special thanks toEdward Ramsden at Caburn Capital for his extraordinarilyinsightful comments, suggestions, and editing work; toNorbert Lou at Punchcard Capital, particularly for hisinspiration and suggestions for Chapter 9; and to PatrickEde at Gotham Capital for his major contributions to theMagic Formula study, for his intelligent and helpful

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comments, and for his editing talents. In addition, mybrother, Richard Greenblatt at America Capital, deservesa major part of the credit for being my editor-at-large, forhis many good ideas, for his numerous contributions toeach chapter, and especially for his encouragement withthis project and throughout my life.

I am also grateful for the many helpful contributionsand inspiration provided by Dr. Sharon Curhan (my sister,and my favorite artist), Dr. Gary Curhan, Joshua Curhan,Justin Curhan, Linda Greenblatt Gordon at Saddle RockPartners, 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, RodMoskowitz, John Scully, Marc Silbert, David Rabinowitzat Kirkwood Capital, Larry Balaban, Rabbi Label Lam,Eric Rosenfeld at Crescendo Partners, Robert Kushel (mybroker at Smith Barney), Dan Nir at Gracie Capital,Brian Gaines at Springhouse Capital, Bruce Newberg(who got me started), Matthew Newberg, and Rich Pzenaat Pzena Investment Management. Special thanks toDavid Pugh, my editor at John Wiley, and Sandra Dijk-stra, my literary agent, for their encouragement andenthusiastic support of this project. Thank you also toAndrew Tobias for graciously writing the foreword andfor being a good friend.

[x ] AC K N OW L E D G M E N TS

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I would also like to thank my two oldest children,Matthew and Rebecca Greenblatt, for being willing stu-dents and readers (and for laughing at most of the jokes).To my three youngest children, thank you for your inspi-ration. And to all the kids, thank you for the joy you bringeach day. Thank you also to my beautiful wife, Julie, forher sage advice with this book, and in life, for her love andsupport and for each precious day together.

AC K N OW L E D G M E N TS [x i ]

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Foreword

The best thing about this bookfrom which I intend tosteal liberally for the next edition of The Only InvestmentGuide Youll Ever Needis that most people wont believeit. Or, believing it, wont have the patience to follow itsadvice. Thats good, because the more people who knowabout a good thing, the more expensive that thing ordi-narily becomes . . . bye-bye bargain.

Yet unlike most systems meant to exploit anomaliesin the market, Joel Greenblatts simple notion will likelyretain at least a good deal of its validity even if it becomeswidely followed.

I dont want to spoil the surprisethe book is shortenough as it is. My role here is simply to introduce you tothe author, so you have some sense of just how far you cantrust him.

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