Sunday, November 1, 2009

The Little Book That Beats The Market: Chapter 13

Joel Greenblatt, the book's author, is a value investor extraordinaire and a professor at Columbia's business school. In the book, Greenblatt discusses and justifies the "Magic Formula", a stock selection method that allows individual investors to beat the market using value investing.

While he cannot guarantee the results of the magic formula going forward, Greenblatt does believe that using it over the long-term will provide investors with excellent returns. But despite the money that can be accrued following this technique, Greenblatt doesn't believe this type of investing adds any value to society.

While the stock market does provide a valuable service, creating a secondary market that allows the primary market to raise capital for companies that need it to grow, Greenblatt believes that 95% of the trades out there are completely unnecessary to serve this purpose. For this reason, Greenblatt makes the case that investors who profit from this formula should use some of those profits for purposes that do benefit society.

In particular, Greenblatt argues that the education system needs help. Education is the foundation for the high-level work force that helps the economy thrive. But much potential is wasted. In every major US city, only half of public school ninth graders end up graduating from high school.

In a capitalist system, capital moves from poor businesses to productive businesses, and that's what helps the economy thrive. In the school system, however, it is very difficult to close poorly performing schools and stop paying teachers that can't get the job done, in order to divert capital to better performing schools/teachers. Greenblatt argues that this issue needs to be addressed, and provides the reader with some means to do so.

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