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Use a simple formula to pick stocks from "summary" of The Little Book That Beats the Market by Joel Greenblatt
The idea behind the simple formula for picking stocks is to find good companies that are priced at bargain levels. The formula consists of two factors: return on capital and earnings yield. Return on capital is a measure of how well a company is using its capital to generate profits. Earnings yield, on the other hand, is a measure of how cheap a company's stock is relative to its earnings. By combining these two factors, a list of good companies at bargain prices can be generated. The formula works by ranking companies based on their return on capital and earnings yield, and then investing in the top-ranked companies. This approach is based on the principles of value investing, which involves buying good companies at bargain prices. By focusing on these two factors, the formula is able to identify companies that are both high quality and attractively priced. The simplicity of the formula is one of its key strengths. By focusing on just two factors, investors can quickly and easily identify potential investment opportunities. This simplicity also helps to avoid the pitfalls of overcomplicating the investment process. By sticking to the basics, investors can stay focused on what really matters in investing: buying good companies at bargain prices. Another advantage of the formula is its clarity. The criteria for selecting stocks are clearly defined and easy to understand. This makes it easier for investors to follow the formula and make informed decisions about their investments. Clarity is important in investing because it helps investors avoid confusion and uncertainty, which can lead to costly mistakes. The logical sequencing of the formula is also a key aspect of its effectiveness. By first ranking companies based on return on capital and earnings yield, the formula ensures that investors are focusing on the most important factors. This logical sequence helps investors prioritize their investment decisions and avoid getting distracted by less important factors. Transition words and phrases are used throughout the formula to guide investors through the process of selecting stocks. By clearly explaining each step in the formula, investors can easily follow along and understand how to apply the formula to their own investment decisions. This helps to maintain consistency in tone and style, ensuring that investors can easily grasp the concepts being presented.- The simple formula for picking stocks is a powerful tool for investors looking to beat the market. By focusing on return on capital and earnings yield, investors can identify good companies at bargain prices and potentially earn higher returns on their investments. The simplicity, clarity, logical sequencing, and transitional guidance of the formula all work together to make it an effective and easy-to-use tool for investors
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