Book Summary
First published by Wiley in 2005, The Little Book That Beats the Market is Joel Greenblatt’s attempt to answer a question most investing books dodge: can an ordinary investor beat the market without spending their life studying stocks? Greenblatt’s answer is yes — with a formula simple enough to fit on an index card. The book became a New York Times bestseller, and its magic formula has since become one of the most widely discussed stock screens in value investing.
The formula has two ingredients. First, find good businesses — companies that earn high returns on the capital they employ. Second, buy them cheap — companies whose earnings are high relative to their price. Greenblatt ranks a large universe of stocks on both measures, combines the rankings, and buys the top thirty or so, holding them for a year before re-ranking and refreshing the list. The book explains the idea through a classroom story about kids running a small business, then walks through the data: in Greenblatt’s backtest of 1988 through 2004, the formula returned about 30 percent a year, against about 12 percent for the S&P 500.
What makes the book work is its honesty about why most people fail at this. The formula is simple, but following it is not easy: it underperforms for stretches of years, and the temptation to tinker is constant. Greenblatt’s real subject is not the screen but the discipline — the willingness to trust a tested process through the years when it looks broken. That is why the book reads less like a stock-picking manual and more like a lesson in patience.
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Who is Joel Greenblatt?
Joel Greenblatt is a value investor and the founder of Gotham Capital, the investment partnership he started in 1985, and he is now managing principal and co-chief investment officer of Gotham Asset Management, its successor. He is also an adjunct professor at Columbia Business School, where he teaches a class on value investing. His first book, You Can Be a Stock Market Genius, published in 1997, is a classic on special situations — spinoffs, restructurings, and other corners of the market where careful analysis still pays.
Greenblatt’s reputation rests on two things: a long record of strong returns at Gotham, and a gift for explaining value investing without jargon. The Little Book That Beats the Market was his second book and his most popular, turning a quantitative screen into a story a non-specialist could follow. The 2010 update, The Little Book That Still Beats the Market, added a new introduction and afterword responding to the financial crisis and to readers’ questions — which is why this site reviews the two books separately: the original is the purer statement of the formula, and the update is the author’s second thoughts on it.
Lessons From The Little Book That Beats the Market
Buy good businesses at bargain prices — and let the ranking do the work. The formula’s two halves measure different things: return on capital measures quality, and earnings yield measures price. Neither alone is enough. A cheap bad business stays cheap, and a great business bought at any price can still lose you money. The ranking forces you to demand both at once, which is the discipline most stock pickers skip.
A simple system beats a clever one you will not follow. Greenblatt’s formula is deliberately simple enough to run in an afternoon with a free stock screener: thirty stocks, held a year, then re-ranked. The simplicity is the point. A system you understand is a system you will stick with when it underperforms, and a system you abandon at the first bad year is worthless no matter how clever it is.
The market rewards patience, not activity. Even in Greenblatt’s own backtest, the formula trailed the market for stretches of years at a time. The investors who earned the headline returns were the ones who held on through those stretches — and the ones who quit after a bad year earned far less than the formula itself. The practical habit is to judge a system over years, not quarters, and to decide in advance how long you will give it.
Your biggest edge is your own behavior. The formula fails for most people not because the screen is wrong but because they abandon it after a bad year, or tweak it after a good one. Greenblatt’s book is, underneath the screen, a book about that failure mode: the market’s greatest inefficiency is not in prices but in investors, who cannot sit still. Discipline is the moat.
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Criticisms of the Book
The main weakness of The Little Book That Beats the Market is its backtest. The headline returns come from a period — 1988 to 2004 — when small value stocks did unusually well, and critics have argued that the formula is partly a repackaging of the well-known value and quality factors rather than a new discovery. Since the book was published, the formula’s edge has looked smaller in some stretches, and the book’s own data is now two decades old. Readers should treat the 30 percent figure as history, not a promise.
The book is also thin on implementation. It tells you to buy the top thirty stocks but says little about taxes — annual turnover in a taxable account is a real cost — or about how to handle the formula’s worst years, when it can trail the market badly. The original screen also excluded financial stocks and utilities, and the book says little about why or what to do with them. Readers who want the fuller value framework should pair it with The Intelligent Investor.
Who is This Book For?
This is the book for an investor who likes the idea of value investing but does not want to read financial statements for a living. It pairs naturally with The Little Book That Still Beats the Market, Greenblatt’s own update, and with You Can Be a Stock Market Genius for readers who want the special-situations side of his work. Readers who enjoyed either will find this one the most practical of the three — a system to run, rather than a set of stories.
It is less useful for readers who already run quantitative screens. If you know what earnings yield is and already hold a portfolio of thirty stocks, much of the book will feel elementary. It is also not a book about building a portfolio: it teaches you how to pick stocks, not how to decide how much of your money belongs in stocks at all. For that question, start with The Little Book of Common Sense Investing.
Final Thoughts
The Little Book That Beats the Market has lasted because it respects the reader’s time and intelligence. It makes a bold claim — beat the market with a simple formula — and then shows its work, including the years when the formula looked foolish. That honesty is rarer than the formula itself.
Read it before you build your first stock screen, and read it again after your first year of underperformance — the second time through, the chapter on patience reads less like theory and more like a warning. As an introduction to quantitative value investing, it remains one of the clearest places to start.
