Sunday, June 1, 2008

I'm very late to the game on this topic, I know, but I was catching up on some Kiplinger's podcasts, and listened to one on Joel Greenblatt's The Little Book That Beats the Market. I went to the Kiplinger's site to learn more.

The Little Book argues that if you know a mere two numbers, you can identify those great companies selling at discount prices. The first is return on capital, because a company that can reinvest its profits at a high rate of return will become a very successful business. The second is earnings yield, or earnings per share divided by the share price. The higher the earnings yield, the more bargain-priced the stock.

To make it easy for everyone to find great buys by the numbers, Greenblatt maintains, where you can order up (free, so far) your own list of candidate stocks that score best by the two criteria.
The article goes on to explain how the formula broke down in the short term, and Greenblatt's response. I haven't tried using Greenblatt's method myself, but it's worth keeping an eye on. At a minimum, I'll register at Greenblatt's site.