The Little Book That Still Beats the Market: A Review

📖 What is the book about?🔗

It's Joel Greenblatt's attempt to distil value investing into something a teenager could follow, and he mostly succeeds. The core idea is Magic Formula investing: rank every stock on two metrics, buy a basket of the top-ranked names, hold for roughly a year, then repeat. The two metrics are return on capital (how efficiently a company uses its assets to generate profit, signalling a quality business) and earnings yield (how cheap the stock is relative to its earnings, signalling a bargain price). You combine the rankings rather than picking one, buy 20 to 30 of the top names, and rebalance annually.

Greenblatt wrote the original in 2005; the "still" edition (2010) updated the research with data through the 2008 crisis, and the original backtest covered 17 years of US market data. This is not a random blogger with a hot take: Greenblatt founded Gotham Capital in 1985 and reportedly ran it to around 50% annualised returns before fees between 1985 and 1994, one of the most remarkable track records in hedge fund history, and has taught value investing at Columbia Business School since 1996. The book is written deliberately simply, simple enough for his own kids, which is both its greatest strength and, for experienced investors, occasionally its weakness.

⚖️ Strengths and weaknesses🔗

👤 Who should read it, and who should skip it?🔗

🔍 What do critics say?🔗

The critical reception was warm, with major financial publications praising it as one of the clearest guides to value investing available and among the best books on the subject in years. Those endorsements hold up: as an introduction to the logic of value investing and the behavioural reasons it works, the book is excellent. The more measured criticism comes from the investing community rather than book reviewers: the formula's real-world performance since publication has been inconsistent, the strategy requires more emotional discipline than most investors have, and the US-only implementation limits its usefulness for non-American readers. Some later analysis has even questioned whether the formula still works as well as the backtests suggested.

💬 What do readers say? Goodreads and Reddit🔗

On Goodreads it holds around 4 out of 5 from thousands of ratings, with the majority giving it four or five stars. The praise is consistent: readers love the accessibility, the clarity of the core idea, and that Greenblatt explains the why behind the formula. Many describe it as the book that finally made value investing click. The criticism is equally consistent: the US-centricity, the fact the formula ignores balance-sheet risk and fraud, and the discipline required to stick with it.

🇦🇺 The Australian angle🔗

The value-investing logic is universal, buying quality businesses at cheap prices works in principle on any market, including the ASX. But the practical implementation is a different story:

• The tools don't exist for Australia. The official Magic Formula screener is US-only, so applying it to Australian stocks means pulling the data yourself, ranking manually and building your own process, doable for experienced investors but a significant lift.
• The market is too concentrated for easy diversification. The ASX has around 2,000-plus listed companies, but the top 20 account for the bulk of market capitalisation, so a formula-based portfolio will inevitably be heavy on banks and miners.
• Franking credits change the maths. Imputation credits on fully franked dividends boost after-tax returns in ways the formula doesn't account for, so a stock that looks cheap on earnings yield might look cheaper still after the tax benefit.
• For most Australians, the simpler path wins. A low-cost ETF tracking the broad ASX or global equities, plus maximising super, will outperform most active strategies over the long run.

That said, experienced ASX investors genuinely interested in quantitative value investing, and willing to do the screening manually, may find the framework useful, the ideas translate even if the tools don't. For the value-investing classic it descends from, see our Intelligent Investor review, and for another practitioner's take on stock-picking, our One Up On Wall Street review.

💰 The verdict🔗

Yes, read it, with clear eyes. This is a genuinely good book: the Magic Formula is elegant, the behavioural argument is compelling, and Greenblatt's writing makes complex ideas feel simple without dumbing them down. For anyone curious about how value investing actually works, it's one of the clearest explanations available. But "worth reading" and "worth implementing" are two different things: the real-world discipline required to stick with the formula through multi-year underperformance is harder than the book suggests, the tools are built for US markets, and for most Australian investors a simple passive strategy will deliver better outcomes with less effort and less stress. Read it for the ideas, and be honest with yourself about whether you'll actually implement it. Our rating: 3.5 out of 5.

❓ Frequently asked questions🔗