The Little Book that Beats the Market

I have just finished reading Joel Greenblatt's book. Despite its cutesy style, it sounded quite a good strategy to me:

Pick shares with both dividend yields and rates of return on funds invested in the top 10% of the group of large companies- with some excluded categories e.g. miners

Hold for 2-3 yrs.

He claims this beats the market most,but not all of the time in the US.

Has anyone else read the book and/or used a similar strategy on the ASX and how did it go?

Paul Mason

 

US market is different to OZ market. What works in US may not work here.

 

The Dog theory simply suggests that high yields mean either the company is paying a high amount of profit out or that the market has undervalued the price. If the latter then this may indicate a buying opportunity.

I think these simplistic systems are not enough on their own but may be used to shortlist some choices.

 

Why avoid miners?

BHP 28.110 average price paid, 08/02/2007 first buy, 38.580 todays price and a lousy 37.25% gain plus dividends

RIO 85.315 average price paid, 27/04/2007 first buy, 94.100 todays price and a lousy 10.3% gain plus dividends

The wages of sin are -

CCL 7.735 average buy, 16/01/2007 first buy, 9.530 todays price and another lousy 23.21% gain plus dividends

What has our market done over this time?

 

What would you look for in addition, Simon?

Paul

 

I take your point, Bundy. But I think he is suggesting a system which will work continuously over a long period, not just during a minerals boom as we have now. I think this will last 'a long time', though.

 

Because Industrials have a better history of delivering growing yields. This is essential for a long term portfolio.

 

I personally have a fairly conventional portfolio that was bought to be held forever. I look for a history of dividend growth plus a Buffetlike understanding of what the company actually does. I have finished with my speculative buys hoping that the dotcom idea will pay off. Not to say that this is wrong.

I believe that industrials fit my ideas better than most resource companies though this isn't a hard and fast rule. RIO and BHP would also fit with my other stocks.

I buy more when I can afford to and when Mr Market loses interest in the share I am watching due to other factors. Factors like the recent dips due to the US Lending issues. Mr Market took his eye off the ball for a bit and I grabbed $50K worth of something which I had been watching for a while. My strategy will never see me cruising for chicks in a Ferrari But I never lose sleep when there is a bit of market tumult and because I never sell it doesn't really matter what happens to prices (within reason) as long as the divvies continue to come and grow each year. I believe they are the key.

If this interests you then grab a hold of this book. I reread it each year.

Having said that I am about to invest in a pure speccy pre IPO that owns some promising tenements. This is totally seperate to my core portfolio and is not part of my long term plan. But I am happy that I can afford it at my stage of wealth creation.

Lastly I am no expert. Plenty of people do way better than I do. But considering I have never been given a free handout I am often surprised at what I have built so far and it does snowball. I am happy to give people the lessons I learnt the hard way but often wonder if free advice is meaningless without the pain of loss to reinforce it

I am rambling now ...

Sorry mate - I don't have any hard and fast formulae for stock picking.

 

Yeah, I'm more of a Toyota bloke meself. Though I do catch myself dreaming about the latest Morgan!

Paul

 

I like shares that pay good dividend. It's a buffer against your income should you lose job in short term you are not burden by interest payments.
Also what I am hoping is that I will only need to -ve gear them for a medium term (approx 5 years) then after that the dividend will be more than enough to pay interest payments. I can't see that happening with my IP.
I can then continue adding into my portfolio and still have money to enjoy myself. Once I get to a stage that they pay for themselves I can just let them grow. What I like to see one is that I have enough passive income to support my lifestyle and retirement while the base investment continue to grow.
I am also a believer that some of the shares that are classed as growth stocks will not deliver growth that people are thinking. And many shares that pay good dividend will have fantastic growth.
Having to say this, I am also holding shares that don't pay good dividend because I feel they will perform quite well. Only time will tell.

The same with Simon, I have to re read some books to keep me on the track. I do get side tracked sometime.