Posted by Dave on October 16, 2012
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
Six years ago, I read Joel Greenblatt’s “The Little Book That Beats the Market“. I read it, and was very skeptical of the claims made that following the author’s methodology would result in 30+% returns. Quickly working these returns out over a 15 year period, an annual $10,000 investment with the prescribed juggling of stocks compounded would result in over $1 million in your portfolio in 13 years. I don’t know about you, but this seemed sort of unrealistic to me, so I never really followed it. I was cleaning off my bookshelf the other day and came across this book again.
I got curious, and thought I’d look up and see what the returns were if I would have utilized the book over the past six years. It’s interesting to note that most people are not able to stay with the strategy outlined in the book for the long-term, or at least they stop writing about it after about 8 or 9 weeks. Additionally, anyone who tried wasn’t able to repeat the returns in the published book. Both of these facts don’t really make me feel too bad about not following this book to fortune. Additionally, returns were not at all favourable by anyone who followed this strategy and fluctuated greatly.
For those who haven’t taken the 2 hours to read this “Little Book”, the basis of the investment strategy is to follow the formula (EBIT / (Net Working Capital + Net Assets)) to screen the stocks, and to pick 5 to 7 stocks every quarter until you hold 20 to 30 stocks. You are supposed to annually flip the stocks to maintain a 20-30 company portfolio.
The portfolio’s selection depends on capital gains and faith in the formula, neither of which I have a lot of faith in. I prefer more tangible returns (such as dividends) and at least if I choose a poor investment, there is a reason for it other than a math formula going wrong.
One quality that this method and the method that many people interested in early retirement have (at least the ones who don’t attempt to time the market) is the fact that some years will provide very negative returns, and the best thing to do (probably) is to keep with your plan – to continue to buy stocks in the down market, a difficult thing to talk yourself into.
As a test, I think I will “paper” trade by this method over the next few years, it will only take about 10 minutes every 3 months, and may be interesting to know the results over a three-year period of time. I don’t have a lot of faith in this type of investing, but it may be interesting to have my own results.
Would you invest in a down market? Have you in the past? If you have an investment plan in place, what would make you change your plan?