The Little Book That Beats the Market (Little Books. Big Profits 8)

by Joel Greenblatt

How can owning just five to eight stocks possibly be a safe strategy? Think of it this way.24 You’re a successful local businessman who has just sold off his business for $1 million. You want to invest that money wisely so that you can safely earn a good return over time. You have the opportunity to reinvest the proceeds from the sale of your business by buying an ownership stake in some of the other businesses in town. You have some understanding of about 30 of those businesses, and your plan is to invest in companies that you understand well, that have a good future, and that are available at a reasonable price. For those companies about which you feel most confident in your ability to make predictions, you project what normal earnings should be several years down the road. You also look for companies that you believe will be able to continue in business for many years and for companies that should have the ability to grow their earnings over time. Then you calculate earnings yield and return on capital based on your estimates for each of those companies. Of course, your goal is to find good businesses that can be purchased at bargain prices. On the basis of your analysis, you select your five favorites and invest $200,000 in each. Does that sound like risky behavior? It would be if you had no idea how to read financial statements or evaluate individual businesses. But if you do have that ability, is buying a stake in your five favorite businesses enough? Would owning a ...