Advisor Blog

One of our clients that we really appreciate recently read Joel Greenblatt's new book The Big Secret for the Small Investor.  He thought that it made some good points and asked me to read it.

He's right.  The book is written for the average investor and explains some important concepts using plain English and numerous good examples.  In my opinion, there are two really important topics that he covers very well.  First, the explanation of why the vast majority of mutual fund and professional money managers fail to beat their benchmark index.  He also provides a great explanation of why attempting to pick individual stocks using fundamental analysis is a seriously flawed method.  As an aside, Benjamin Graham - probably the most famous value investor of all time and father of fundamental analysis, admitted later in his life that most investors would be better off in an index fund.

The "big secret" that the book discusses is that a diversified portfolio of value stocks has a higher expected rate of return than the market.  If you're familiar with our investment philosophy, you already know that.  Greenblatt makes the point that more value exposure is better over long periods of time.  Right again. 

He also explains that there can be long periods of time when the value effect is absent and it's tough for most investors to stick to the strategy.  He nailed that one, too.  Then he goes off the rails and suggests that allowing for a +/-10% tactical weighting to stocks will help an investor stay the course.  He fails to mention that the value effect is very strong in markets around the world and that it occurs at different times in different markets, so a globally diversified value portfolio can be much more robust and deliver more return per unit of risk. 

He also fails in the discussion of the other factor that provides higher expected returns in an equity portfolio - exposure to small cap stocks, by dismissing it with a reference to one paper.  That's amazing, since it's very well researched and documented.  Nevertheless, the book is well worth reading for most individual investors.