Joel Greenblatt Quotes
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1. Most people and businesses can’t find investments that will earn very high rates of return. A company that can earn a high return on capital is therefore very special.
2. Companies that earn a high return on capital may also have the opportunity to invest some or all of their profits at a high rate of return. This opportunity is very valuable. It can contribute to a high rate of earnings growth.
3. Companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above- average profits.
4. By eliminating companies that earn ordinary or poor returns on capital, the magic formula starts with a group of companies that have a high return on capital. It then tries to buy these above-average companies at below-average prices.
5. Since the magic formula makes overwhelming sense, we should be able to stick with it during good times and bad.
Sayfa 111Kitabı okudu
After more than 25 years of investing professionally and after 9 years of teaching at an Ivy League business school, I am convinced of at least two things:
1. If you really want to “beat the market,” most professionals and academics can’t help you, and
2. That leaves only one real alternative: You must do it yourself.
Sayfa 21Kitabı okudu
By eliminating companies that earn ordinary or poor returns on capital, the magic formula starts with a group of companies that have a high return on capital.
In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.
The formula starts with a list of the largest 3,500 companies available for trading on one of the major U.S. stock exchanges.* It then assigns a rank to those companies, from 1 to 3,500, based on their return on capital. The company whose business had the highest return on capital would be assigned a rank of 1, and the company with the lowest return on capital (probably a company actually losing money) would receive a rank of 3,500. Similarly, the company that had the 232nd best return on capital would be assigned a rank of 232.
Sayfa 77Kitabı okudu
That’s the point—you would rather have a higher earnings yield than a lower one; you would rather the business earn more relative to the price you are paying than less!
Sayfa 66Kitabı okudu
So, here’s what you need to know:
1. Buying a share in a business means you are purchasing a portion (or percentage interest) of that business. You are then entitled to a portion of that business’s future earnings.
2. Figuring out what a business is worth involves estimating (okay, guessing) how much the business will earn in the future.
3. The earnings from your share of the profits must give you more money than you would receive by placing that same amount of money in a risk-free 10-year U.S. government bond. (Remember: Last chapter we set 6 percent as your absolute minimum annual return when government bond rates fall below 6 percent)
4. No, I haven’t forgotten about the magic formula. But you’re going to have to stop bugging me about it, okay? Sheesh!
Sayfa 49Kitabı okudu
And what does the magic formula do with this group of good companies? It tries to buy them at bargain prices! The formula chooses only good companies that also have a high earnings yield. A high earnings yield means that the formula will buy only those companies that earn a lot compared to the price we are paying. Hmmm... buying above-average companies at below average prices, it sounds like it should work!
Sayfa 110Kitabı okudu
So here it comes. What do you think would happen if we simply decided to buy shares in companies that had both a high earnings yield and a high return on capital? In other words, what would happen if we decided to only buy shares in good businesses (ones with high returns on capital) but only when they were available at bargain prices (priced to give us a high earnings yield)? What would happen? Well, I’ll tell you what would happen: We would make a lot of money! (Or as Graham might put it, “The profits would be quite satisfactory!”)
Sayfa 75Kitabı okudu
Graham figured that on average he would end up owning a basket of bargains. Sure, the low prices of some of the stocks would be justified. Some companies deserve low prices because their future prospects are poor. But on average, Graham figured that the purchases made by using his formula would be bargains that bargains created by Mr. Market practically giving away businesses at unreasonably low prices.
Sayfa 74Kitabı okudu