Joel Greenblatt Quotes
You can find Joel Greenblatt quotes, Joel Greenblatt book quotes, the most impressive sentences and paragraphs on 1000Kitap.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.
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Here comes the summary:
1. Paying a bargain price when you purchase a share in a business is a good thing. One way to do this is to purchase a business that earns more relative to the price you are paying rather than less. In other words, a higher earnings yield is better than a lower one.
2. Buying a share of a good business is better than buying a share of a bad business. One way to do this is to purchase a business that can invest its own money at high rates of return rather than purchasing a business that can only invest at lower ones. In other words, businesses that earn a high return on capital are better than businesses that earn a low return on capital.
3. Combining points 1 and 2, buying good businesses at bargain prices is the secret to making lots of money.
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Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you’re still an idiot.
In other words, owning a business that has the opportunity to invest some or all of its profits at a very high rate of return can contribute to a very high rate of earnings growth!
Step by Step Guide
• Use Return on Assets (ROA) as a screening criterion. Set the minimum ROA at 25%. (This will take the place of return on capital from the magic formula study.)
• From the resulting group of high ROA stocks, screen for those stocks with the lowest Price/Earning (P/E) ratios. (This will take the place of earnings yield from the magic formula study.)
• Eliminate all utilities and financial stocks (i.e., mutual funds, banks and insurance companies) from the list.
• Eliminate all foreign companies from the list. In most cases, these will have the suffix “ADR” (for “American Depository Receipt”) after the name of the stock.
• If a stock has a very low P/E ratio, say 5 or less, that may indicate that the previous year or the data being used are unusual in some way. You may want to eliminate these stocks from your list. You may also want to eliminate any company that has announced earnings in the last week. (This should help minimize the incidence of incorrect or untimely data.)
• After obtaining your list, follow steps 4 and 8 from the magicformulainvesting.com instruction page.
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Last chapter we learned that, all things being equal, if we have the choice of buying a stock with a high earnings yield (one that earns a lot relative to the price we are paying) or buying one with a low earnings yield (one that earns very little relative to the price we are paying), we might as well choose the one with the high earnings yield.
We also learned that, all things being equal, if the choice is between buying shares in a company that earns a high return on capital (a company whose stores or factories earn a lot relative to the cost to build them) and buying shares in a company that earns a low return on capital (a company whose stores or factories earn very little relative to the cost to build them, like Just Broccoli), we might as well choose the one with the high return on capital!
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