7 Lessons from The Little Book That Still Beats the Market

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Dear friends,

There are plenty of investing books out there, but few break things down as simply and effectively as The Little Book That Still Beats the Market by Joel Greenblatt.

Greenblatt introduced the concept of "magic formula investing"—a systematic approach that focuses on buying good companies at cheap prices. Sounds obvious, right? But most investors ignore these two simple principles in practice.

After reading this book years ago, I realized that its lessons go beyond just a formula. It teaches core principles that, when applied correctly, can dramatically improve your ability to pick winning stocks.

Let’s break down the seven biggest lessons from the book.

1️⃣ Buying Great Companies at Cheap Prices Works

Greenblatt’s entire strategy revolves around two simple metrics:

• Earnings yield (cheapness) – Look for a high earnings yield, calculated as EBIT/Enterprise Value. A good rule of thumb is an earnings yield above 8 percent.

• Return on capital (quality) – Look for companies with a return on capital above 20 percent, calculated as EBIT/(Net Working Capital + Fixed Assets).

The key is to find stocks that rank high on both. A company with strong returns on capital is a great business, and if it is also trading at a discount, it is likely undervalued.

This is the core of magic formula investing—buying companies that are both high quality and trading at cheap valuations. While it sounds simple, most investors ignore this approach because they either chase overpriced growth stocks or cheap companies with no real advantage.

Greenblatt proves that if you consistently follow this method, you will beat the market over time.

Key takeaway: The best investments combine quality and value. A cheap stock is not always a good investment, and a great company is not always a good buy at any price. You need both.

2️⃣ Most Investors Overcomplicate Things

One of the biggest takeaways from Greenblatt’s book is that investing doesn’t have to be complicated.

Most investors drown themselves in information—watching news headlines, following analyst opinions, and trying to predict short-term market moves. But in reality, focusing on just two numbers—earnings yield and return on capital—already puts you ahead of the majority of investors.

The stock market is full of noise, but Greenblatt’s strategy shows that sticking to a simple, rules-based approach is often more effective than trying to outthink the market.

Warren Buffett once said, “Investing is simple, but not easy.” The reason it is not easy is that most people do not have the patience or discipline to follow a strategy consistently.

Key takeaway: You don’t need a complex strategy to succeed in investing. Sticking to a simple, proven process beats constantly chasing the next big thing.

3️⃣ Cheap Stocks Are Often Cheap for a Reason

Greenblatt’s formula looks for cheap stocks, but not every cheap stock is a good investment. Some businesses are in decline, have poor management, or face serious long-term headwinds.

This is where many investors go wrong. They see a stock trading at a low price-to-earnings ratio and assume it must be undervalued. But if a company has low returns on capital, shrinking revenues, or massive debt, it could be a value trap—cheap for a reason and unlikely to recover.

The key is combining cheapness with quality. If a stock has a high earnings yield but a low return on capital, it is probably not a great investment. Greenblatt’s formula weeds out bad businesses by making sure companies also have high returns on capital.

Key takeaway: Just because a stock looks cheap does not mean it is a bargain. Focus on businesses that are both undervalued and high quality.

4️⃣ The Best Investing Strategies Feel Uncomfortable

One of the toughest parts of following Greenblatt’s magic formula is that it often leads you to buy stocks that no one else wants.

Many of the best opportunities in the market are in stocks that have been beaten down, ignored, or even hated. If you are following the strategy correctly, you will often feel like you are making the wrong move because you are buying companies that the media or Wall Street is pessimistic about.

For example, in past market cycles, stocks like Apple, Amazon, and Tesla all went through periods where they looked like terrible investments. Yet, investors who focused on the numbers—strong earnings yield and return on capital—were rewarded for their patience.

Greenblatt explains that the best investing strategies will feel uncomfortable in the moment. If a strategy always feels good, it probably means you are just following the crowd.

Key takeaway: The best investments often feel wrong when you make them. Being comfortable with discomfort is a major advantage in the market.

5️⃣ The Market is Emotional, But Math Wins in the Long Run

Short-term market movements are driven by emotions—fear, greed, and hype. Stocks that are fundamentally strong can get crushed because of temporary bad news, while weak companies can soar on speculation.

Greenblatt’s approach removes emotions from the equation. Instead of buying based on opinions, headlines, or gut feelings, you follow a rules-based system that focuses on numbers. Over the long run, the market rewards businesses that generate strong cash flows and reinvest capital efficiently.

This is why systematic investing works. If you rely on emotions, you will likely panic sell at the worst time or chase overhyped stocks right before they crash. But if you stick to a strategy that focuses on value and quality, math will eventually beat emotions every time.

Key takeaway: Short-term emotions drive stock prices, but long-term returns are determined by business fundamentals. Let the numbers guide your decisions.

6️⃣ Even the Best Strategy Will Underperform Sometimes

One of the biggest reasons investors fail is that they give up on a strategy too soon.

Greenblatt explains that even though the magic formula beats the market over the long run, there will be months or even years when it underperforms. This is where most investors struggle. They see their portfolio lag for a while, lose patience, and jump to a new strategy—usually at the worst possible time.

But here is the reality: every investing strategy has bad periods. Even Warren Buffett has had years where he trailed the market. The key is having the discipline to stick with a proven system, even when it feels like it is not working.

Greenblatt suggests that investors commit to at least three to five years when using the magic formula. That time frame allows the strategy to play out and take advantage of the market’s natural cycles.

Key takeaway: No strategy works all the time. The biggest gains go to investors who have the patience to stick with a proven process through both good times and bad.

7️⃣ Individual Stock Picking is Not for Everyone

Greenblatt believes that magic formula investing works, but he also acknowledges that most investors struggle to follow it consistently.

Picking individual stocks requires discipline, patience, and the ability to ignore short-term noise. Many investors get emotional when stocks drop and abandon their strategy too soon. Others lack the time or interest to research companies and track their investments properly.

For those investors, Greenblatt suggests considering index funds or automated investing strategies that follow the same principles without requiring constant decision-making. The most important thing is to invest in a way that matches your personality and ability to stick with the process.

Some people thrive in stock picking. Others do better with a passive, rules-based approach. The worst thing you can do is jump between strategies without a plan.

Key takeaway: Investing success is not just about picking stocks—it is about finding a strategy you can stick with for the long haul.

Final Thoughts

Greenblatt’s The Little Book That Still Beats the Market is one of the most practical investing books out there. It cuts through the noise and focuses on what actually works—buying great companies at fair prices and sticking to a proven process.

But the biggest challenge is execution. Many investors know what they should do, but emotions, impatience, and overcomplication get in the way. The key is to trust the process, avoid chasing short-term trends, and let the numbers guide your decisions.

If you can do that, you will be ahead of 90 percent of investors.

Cheers,

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