Where to Start with Joel Greenblatt: A Reading Guide
Where to start with Joel Greenblatt — how to approach The Little Book That Still Beats the Market, his accessible guide to the Magic Formula — a systematic value investing strategy that ranks stocks by earnings yield and return on invested capital. A complete reading guide.
By Marcus Webb
Joel Greenblatt (born 1957 in Great Neck, New York) is an American hedge fund manager, adjunct professor at Columbia Business School, and author who founded Gotham Capital in 1985. Over the following decade, Gotham averaged approximately 40 percent annual returns before returning outside capital to focus on internal investments — a record that makes Greenblatt one of the most successful value investors in the history of the strategy. He has taught value and special situations investing at Columbia for many years and written several books applying Graham-and-Dodd value principles to general readers. The Little Book That Still Beats the Market (2005, updated 2010) is his most accessible and widely read work.
Where to Start: The Little Book That Still Beats the Market (2010)
Greenblatt designed The Little Book That Still Beats the Market to make value investing legible to readers with no finance background — a magic formula built from two metrics that has, historically, outperformed the market index over extended periods. The Little Book opens with a pedagogical conceit: Greenblatt is explaining investing to his children. The conceit is genuine — the explanations are clear enough to be understood by a reader with no financial background — but the underlying substance is serious. This is a book written by someone who actually beat the market by 40 percent annually over a decade, explaining how he thinks about value.
The Magic Formula is the book’s central contribution. The formula ranks stocks on two factors: earnings yield (how cheap the stock is relative to what the underlying business earns) and return on invested capital (how good the business is at turning invested capital into earnings). Neither factor alone is sufficient: cheap stocks are often cheap because they are bad businesses; good businesses are often expensive because the market has already priced in their quality. The formula’s insight is to look for the intersection — the businesses that are both cheap and good — which the market systematically fails to identify because the reasons a good business is temporarily cheap often look bad in the short run.
The psychology argument is the book’s most important practical contribution. Greenblatt explains with unusual candour that the Magic Formula has periods of underperformance that will feel, during those periods, like the formula is broken. The businesses it selects often look unattractive when the formula selects them; the market’s current pricing reflects genuine short-term problems. Investors who cannot hold a position that is underperforming — who sell when their picks have declined 15 percent — will never capture the returns available to investors who can. The gain is precisely the reward for enduring the period when the market is still wrong.
The backtesting section presents the historical performance of the formula across multiple decades and market environments with appropriate caveats about the distinction between backtested and live performance. Greenblatt is more honest about these limitations than most investing book authors.
Why The Little Book That Still Beats the Market Is the Ideal First Book
For a reader new to Joel Greenblatt, The Little Book That Still Beats the Market is the ideal first book because it is his most accessible and popular work and the fullest expression of his distinctive gift, the clear and engaging teaching of value investing to ordinary investors. The Little Book That Still Beats the Market presents Greenblatt’s famous magic formula, a simple, systematic approach to value investing that seeks good companies at bargain prices, explained in plain, accessible language. As an entry point it is ideal, for it is his best-known book and a clear introduction to his investment thinking, written for the general reader rather than the specialist. It welcomes the newcomer with its simple formula, its clear explanation, and its engaging style, drawing the reader into the principles of value investing. It is among his most famous works and a fine representation of his gifts, so the new reader encounters Greenblatt at his most accessible. For the newcomer interested in investing, then, The Little Book That Still Beats the Market is the natural and ideal starting point.
What to Expect as a New Reader
As a new reader, you can expect The Little Book That Still Beats the Market to be a clear, accessible, and engaging introduction to value investing. You can expect a simple central idea, the magic formula, a systematic approach that seeks to buy good companies at bargain prices. You can expect plain explanation, for Greenblatt deliberately writes for the ordinary investor, making the principles of value investing easy to understand. You can expect the logic behind the formula, for Greenblatt explains why buying quality businesses at attractive prices makes sense over the long term. You can expect an emphasis on discipline and patience, for the approach requires sticking with the strategy through ups and downs. You can expect a short, approachable, and practical book rather than a dense financial text. Expect, in short, a clear, accessible, and engaging introduction to value investing, an ideal first book on the subject.
Going Deeper After Your First Book
Once The Little Book That Still Beats the Market has introduced you to Greenblatt’s thinking, the reader who wishes to go deeper can explore his other books and the wider literature of value investing to which his work is a clear gateway. His other writings, including his more detailed work on special-situation investing, extend his thinking for the more committed investor, while the broad tradition of value investing, from its founders to its modern practitioners, offers many further perspectives the reader is well prepared to explore. Reading more widely deepens your engagement with the principles of value investing that Greenblatt makes so accessible. His clear introduction equips the reader with the core logic, so that the wider literature becomes approachable. Building your reading journey from The Little Book That Still Beats the Market is a matter of following its principles into his other books and the wider value-investing literature. The reader who begins here will have a clear and trustworthy foundation in value investing.
Reading Joel Greenblatt
The Little Book That Still Beats the Market is the ideal entry point. You Can Be a Stock Market Genius (1997) covers Greenblatt’s more advanced special situations strategies — the book that established his reputation among serious investors before Gotham’s returns were public.
For the full Joel Greenblatt bibliography, reviews, and biography, visit the Joel Greenblatt author page on Editors Reads.
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Frequently Asked Questions
Where should I start with Joel Greenblatt?
The Little Book That Still Beats the Market (2010, updated from the 2005 original) is Greenblatt's essential book — a deliberately accessible introduction to value investing that presents his Magic Formula: a systematic strategy for identifying good businesses trading at cheap prices. Greenblatt is the founder of Gotham Capital, which averaged 40 percent annual returns over a decade using value principles, giving his methodology unusual credibility. The book is written to be understood by a twelve-year-old, which is both a genuine aspiration and an accurate description of its accessibility: the concepts are simple, the explanation is clear, and the investment is under two hours of reading.
What is the Magic Formula?
The Magic Formula ranks stocks on two dimensions simultaneously: earnings yield (how much the business earns relative to what you pay for it — the cheapness measure) and return on invested capital (how efficiently the business uses its capital to generate earnings — the quality measure). By combining these two rankings, the formula identifies companies that are both cheap and good — good businesses at bargain prices — rather than cheap companies that are cheap because they are bad, or good companies that are expensive because they are obviously good. Greenblatt provides a website where the formula can be run, gives historical backtests showing consistent market-beating returns, and explains why the strategy works: Mr. Market systematically misprices individual stocks, and a systematic approach to buying the mispriced ones exploits that irrationality.
Why does a simple formula beat professional fund managers?
Greenblatt's answer is partly about the formula and partly about human psychology. The Magic Formula selects stocks that often look unappealing in the short term — companies going through difficulties, in temporarily out-of-favour sectors, or simply misunderstood by the market. These selections frequently underperform for months or years before the market reprices them, and most investors — including professionals — cannot endure that underperformance without abandoning the strategy. The formula's long-term performance comes from buying assets the market is temporarily pricing below their value; the gain is only available to investors who can hold through the period when the market is still mispricing them. Most cannot, which is why the gain persists.
What should I read after The Little Book That Still Beats the Market?
After The Little Book, Greenblatt's You Can Be a Stock Market Genius (1997) covers his earlier, more complicated special situations investing strategies — spinoffs, mergers, restructurings — with more depth and more specific examples. Benjamin Graham's The Intelligent Investor provides the theoretical foundation of value investing that Greenblatt is applying and simplifying. Warren Buffett's partnership letters and Berkshire Hathaway shareholder letters are available free and constitute the most important primary sources for understanding how the value approach works across multiple decades in practice.
