The Little Book That Still Beats the Market | Andrew Tobias

Summary of: The Little Book That Still Beats the Market
By: Andrew Tobias


Embark on an exciting journey into the world of investing with ‘The Little Book That Still Beats the Market’ by Andrew Tobias. Prepare yourself to uncover invaluable tips on how to maximize your profits and minimize your risks in the stock market. This book summary will unravel the mystery surrounding stock prices and introduce you to the brilliant ‘Magic Formula’ which has demonstrated its effectiveness in picking winners. Gain insights into assessing a company’s true value and learn why most investment managers are unable to stick to this approach. Embrace the art of investing, while molding yourself into a money-making extraordinaire.

Investing Made Simple

The book discusses the benefits and drawbacks of relying on financial experts, mutual funds, and stockbrokers for investment advice. The author proposes that index funds, which are low-cost and aim to match the market’s best-performing companies, are the best option for maximizing profits. The book also encourages readers to take control of their investments and learn how to invest themselves.

Understanding Stock Market Fluctuations

Many factors cause stock prices to fluctuate, including undervaluation, overvaluation, and emotional instability of the stock market. Investment legend Benjamin Graham coined the term “Mr. Market” to describe the market’s unstable behavior. By buying stocks during downturns and selling them during upturns, investors can leverage Mr. Market’s emotional swings to reap rewards.

Winning against Mr. Market

To be successful in the stock market, you need to buy stocks below their actual worth, and sell when they are overvalued. To determine a stock’s true value, check the earnings yield and the return on capital (ROC). Earnings yield is the ratio of earnings before taxes and interest expenses to enterprise value, while ROC is the after-tax profit divided by the total investment. A high earnings yield doesn’t always mean a profitable company, so it’s best to consider ROC as well. Companies with an ROC of over 25 percent are considered doing well. By buying shares of undervalued companies with a high return on capital at low prices, you can beat Mr. Market.

Mastering the Magic Formula for Stock Trading Success

Learn how to use earnings yield and ROC figures to create an investment strategy to buy shares from the best companies. The magic formula ranks companies based on their return on capital and earnings yield, combining them to provide the best combination of both factors. By using this formula when investing in the stock market, you can expect higher returns as it has proven successful in the past. A portfolio of around 30 stocks with the best combined rankings returned on average about 30 percent per year, whereas the market average was a mere 12 percent over a 17-year period from 1988 to 2004. Invest wisely with the magic formula for stock trading success.

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