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reddingrunner (94.94)

One of the most valuable lessons...

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March 01, 2014 – Comments (0) | RELATED TICKERS: VTI

... that I've ever learned was from Joel Greenblatt in his Magic Formula book.  I'm just going from memory here, but in the book he claims that anyone can beat the market over time by following his magic formula.  Usually when a formula that works becomes well known (e.g., Dogs of the Dow), it ceases working because too many people are using it.  Greenblatt said he wasn't worried about that happening with the Magic Formula because, while it beat the market over time, there would always be periods, often as long as one or even two years (occasionally even more!), where the MF would lag the market.  When that happens, people give up on it.

Whatever great method you are using to pick stocks: sometimes it will lag.  Sometimes it will lag badly for quite a long time.  Most people give up or switch methods when this happens.  Few have the emotional discipline to ride it out and wait for the pendulum to swing back.   That's why almost no one can beat the market, despite the presence of numerous proven methods for doing so over time.  They only work if you ride them out.  If you keep switching every time your current method hits a cold spell, you are doomed.

Most people fail to beat the market because they don't really trust their method and so they abandon it when it goes cold for awhile- as any and every method will do.

The lesson is obvious, and it is the main reason I have been able to consistently beat the market over the past ten years (despite a few lean times along the way).   

Thank you, Mr Greenblatt! 

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