Thursday, January 05, 2006

The Amazing Invest-o-Matic.

Everybody is looking for the Amazing Invest-o-Matic, which is to say a formula that, when followed, will lead to returns consistently above the market averages. And perhaps "The Little Book That Beats the Market" is it.

I haven't read the book yet, but it's on my list. But from what I've read, it sounds very interesting.

Basically, the book suggests applying a contrarian/value screen to the market, looking for companies that are currently very cheap as measured by earnings yield, yet that also have high returns on capital. By buying a diverse group of companies with these characteristics, you diversify your bet. The bet, of course, is that their value will, eventually, be recognized by the market again.

Will the returns from this formula continue to be as outsize in the future? Probably not, as more people follow this formula and drive down the returns. (Say like what happened with Dogs of the Dow..) But as attention fades.. Little Book, Big Returns.


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