Friday, February 18, 2011

Lessons from the Legends: Joel Greenblatt

This guy has an incredible strategy. It's so easy an elementary school aged child could follow it successfully.

It's based on two basic ideas. You want to invest in:
1. Good companies
2. Cheap companies

How does he measure this? How "good" a company is, is measured by its . A companies return on capital employed measures how good it is, while its price-earnings (PE) ratio (how much you pay per dollar of (adjusted) earnings) measures how cheap it is.

With this basic information he:
1. Takes a list of companies (list size depends on how small of a market cap you are willing to invest in (market cap = share price * # of shares outstanding))
2. Ranks each stock from 1 to n (with 1 being best, 2 being 2nd best, etc) on its return on capital employed and then again on its PE ratio.
3. Combine the two ranks for each company
4. Invest in the top ranking (combined ranks) 20-30 companies
5. Repeat each year

This is the simple method, a more advanced analyst can add some slightly more complicated steps. However, his data shows incredible returns when using this simple strategy.

Check out this video of him talking about his approach:

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15 comments:

  1. BlowingInTheWindFebruary 18, 2011 at 12:14 AM

    It sounds easy enough, but I dont think anyone can just get success from it. You still have to have that good eye.

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  2. ThuganomicsFebruary 18, 2011 at 12:30 AM

    sounds about right. it becomes problematic when too many people focus on just those numbers because there are so easy to skew

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  3. jonwintersFebruary 18, 2011 at 6:54 AM

    are you currently using some of his techniques to trade?

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  4. ZennithFebruary 18, 2011 at 8:04 AM

    I'm a bit skeptical but if it works it works. I'm VERY uneducated with this field but it seems to easy. However, personal feelings aside; Wow, time for some relatively easily earned cash

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  5. AnonymousFebruary 18, 2011 at 10:11 AM

    Wow, thanks for this video it very useful.

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  6. CharlesFebruary 18, 2011 at 10:43 AM

    wow, I am learning some great stuff here thanks

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  7. NunSlaughterFebruary 18, 2011 at 1:04 PM

    the simplest solutions are often the best.

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  8. mtnFebruary 18, 2011 at 1:25 PM

    sounds easy.. but its very risky

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  9. GarthFebruary 18, 2011 at 6:08 PM

    very good advice, i will have to take it all into consideration

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  10. AnonymousFebruary 18, 2011 at 7:21 PM

    Pretty elegant solution actually!

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  11. Austin J. GatsbyFebruary 18, 2011 at 10:15 PM

    WELL GOLLY, Now we all just hope that that ridiculous entrepreneur from Wisconsin is going to go on to make anything worth a share.

    Also, upon explaining this method to a 22 year old Art major, he still did not get it. Winsauce.

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  12. SamFebruary 18, 2011 at 10:51 PM

    Great info! following! nice blog

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  13. FrostyFebruary 18, 2011 at 11:31 PM

    Awesome, I could always use knowledge to help me out with money at later points in life

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  14. AnonymousFebruary 18, 2011 at 11:46 PM

    That is pretty good advice.

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  15. jopjopjopFebruary 19, 2011 at 6:42 AM

    good advice man, going to try this out. are you trading too?

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