The Big Secret for the Small Investor: A New Route to Long-Term Investment Success [Englisch] [Gebundene Ausgabe]

This is a very good book for its intended audience. First, it is short and sweet. At about 156 pages it may seem not so short, but the book is quite small in size, and it probably amounts to, say, 100 normal sized pages. Second, author Joel Greenblatt doesn't simply present his suggested approach for small investors. Rather, he first takes the reader through many of the common investing alternatives that ultimately prove to be too hard, too confusing or just too simplistic for small investors to successfully implement. There's a lot of value in knowing the limits of common investing approaches.

Interestingly, this is not Greenblatt's first book on investing. He has already written "You Can Be a Stock Market Genius," which he now says assumed too much specialized knowledge on the part of readers. It also assumed that small investors have lots (and lots) of time to devote to their investments. Greenblatt claims the book helped a number of hedge fund managers, but they weren't necessarily the target audience. His other book, "The Little Book That Beats the Market," was (and still is) good advice, he maintains, but again most people don't want to do all the necessary work themselves. So, "The Big Secret for the Small Investor" represents his third attempt. Is the third time a charm? At a minimum, I'd say he's much closer. Indeed, for many readers this will prove to be the right mixture of content and sensible advice.

Greenblatt basically groups the small investor's options to four possibilities:

(1) Do it (invest) yourself. However, this is hard. Really hard, to judge from the collective experiences of millions of investors. Many people have little idea as to how to analyze companies and select individual stocks. Further, many do not know how to construct a stock portfolio or know when to buy and sell.

(2) Turn your investments over to a pro. The trouble is that most pros underperform the S&P 500 over the long run. Sure, there are some great pros, but finding them may prove to be at least as hard as successfully investing on your own. In my view, this is a very important point that Greenblatt makes. It's just not as simple as finding the pro with the best track record for the last one, five or ten years. What worked in the past may not work so well in the future. This observation, by itself, could be worth the cost of the book for some investors.

(3) Invest in index funds. However, there are problems with index investing, and congratulations to Greenblatt for developing and explaining these problems in terms that most investors understand. As you read this book, you will come to appreciate the difference between market-weighted ("capitalization" weighted) funds, equally-weighted funds and "fundamentally-weighted" funds. The differences are not trivial, yet most investors are unaware of them.

(4) Use Greenblatt's approach, developed and explained in this book. In fairness to the author, I should let his book speak for itself. However, I will say that his "value-weighted" approach, which amounts to giving more weight to investments that appear more attractively priced (lower price/earnings ratios, etc.), makes sense for many investors.

I have personally invested for many years, and as I look back on my own investing experience I could list many ideas that sounded good to me at the start, but proved to be too complex or too theoretical to work well in the real world. The beauty of this book is that you can save yourself a lot of time by reading Greenblatt's assessments of the typical theoretical approaches and their limitations. For example, financial theory tells us that the value of a company is equal to the value of its future earnings, "discounted" back to today's dollars. The theory is absolutely correct in many respects, but if you try it you'll quickly find out that relatively minor differences in assumed future growth rates (or other variables) make for large differences in today's "value." So what good does that do? As far as traditional Benjamin Graham value analysis goes, the way to succeed is to first determine the value of a company and then to be sure to pay a lot less for it. The "lot less" amounts to Graham's "margin of safety." That's fine for Warren Buffett, who is a master at assessing a company's value. But how are most people going to accurately value a company? They're not. Too many important estimates or guesses are involved.

Okay, this is getting long, so I will draw it to a close. This is an easy to read book that will appeal to (and help) many small investors. It helps identify those approaches that won't work for most people (and in my view, that's perhaps half of the value of the book), and it describes a realistic approach that most people can use. There are no guarantees in investing, of course, so your mileage may vary. At the end of the day, however, this is a worthwhile book for small investors to read. It's well worth your consideration.

Having learned a great amount from Greenblatt's first two books, I was excited to check out his third. However this turned out to be a disappointment. I did not find any idea to study or strategy to follow; the only thing concrete and practical mentioned in the book was "value-weighted indexing (more below), but it didnt provide much new (such as improvement suggestions or empirical studies) compared to what is already out there.

The book first went over well-known concepts such as most institutional money managers fail to beat the market, and small investors may have a better chance with smaller stocks. It also very briefly mentioned the basic valuation methodologies, including (a simplified version of) discounted cash flow, comparable analysis, acquisition valuation and liquidation valuation. Without going into details of any of them, the conclusion was drawn that all these methods are "hard". I'm baffled if the message here is for small investors to give up valuation once-for-all.

The only thing I found useful was in the last two chapters, which explained why value-weighted indexing could yield superior results to equal-weighted indexing, which in turn is better than market-cap-weighted index (e.g. S&P). Since S&P return beats most professional investors already, small investors could beat the "market" and the professionals by investing in value-weighted indices. The author briefly described the idea of weighting by a combination of value (overweight cheap stocks) and quality (overweight good companies), which is the gist of his book "the little book that beats the market". I think this could work wonderfully but alas no results were presented.

Instead of paying for the book, I would recommend first flipping through the pages at a local book store first. It should be an easy read under an hour if you are familiar with the basic investing concepts.

"The Big Secret for the Small Investor" is hedge fund legend and Columbia Business School professor, Joel Greenblatt's third book on value investing. While "The Big Secret" is written for smaller investors, it is likely to have a significant impact on how both individual investors and large institutions invest in the stock market.

Like Greenblatt's other books, "The Big Secret" is extremely well reasoned and is an easy read at less than 150 pages. Greenblatt's writing style is light hearted, humorous and clearly does not take itself too seriously. Not taking the book seriously, however, would be a big mistake. As a hedge fund manager Greenblatt has delivered 40% compound annual returns for over 20 years and is widely considered to be one of the great value investors.

Without getting into all of the details of the book, the "Big Secret" of the book is roughly as follows:
1) Numerous studies have shown that active investors do not beat the market;
2) Index funds beat active managers, have low fees but they are market cap weighted (more weighted towards larger stocks);
3) Market cap weighted indexes by definition own more overvalued stocks and don't own enough undervalued stocks. Think about it this way...if a stock is overvalued it has a higher price than it should and due to the higher price the index owns more shares that would be optimal;
4) Equally weighted indexes outperform market cap weighted indexes but...here is the "secret"...
5) Value weighted indexes (buying stocks based on how cheap they are and how good of a business they are) significantly outperform all of the above. The Value Weighted Index used in the book beat the S&P 500 by an average of 6%-7% per year over the last 20 years.

"The Big Secret" goes through in great detail why a value weighted index will outperform mutual funds and other index products. As simple as this concept is, it is amazing that more money is not allocated to value based indexing but that is likely to change with the release of this book.

I have been a big fan of Joel Greenblatt's other books (and reviewed his last one for Amazon) but "The Big Secret" seems to be the most practical for the widest set of investors. Here is how I would compare it to Greenblatt's other books.

1) "You Can Be a Stock Market Genius" - the definitive read on spin-offs, corporate restructurings and special situation investing. This is the bible for hedge funds or individual investors who spend at least 4-5 hours a week working on their portfolios.
2) "The Little Book That Beat the Market" - this is the little book that started the whole "Little Book" series. A great read for understanding what makes a good company and a good investment. This book is ideal for individuals with less time to spend on stock analysis but would like to construct their own portfolio of value stocks.
3) "The Big Secret for the Small Investor" - this is really a great read for all investors but is specifically suited for those investors who want to pursue an index strategy with the best chance of consistently outperforming the stock market over a long period of time.