Joel Greenblatt: The Little Book That Still Beats the Market

Shares: parts of a business. Each is entitled to a fraction of the business’s earnings.

Earnings yield: return for each share, divided by share price. E.g. if a business earned $1.2 million, with 1 million shares, each share is entitled to $1.2 earnings. At price of $12 per share, earnings yield is $1.2/$12 = 10%.

Compare earnings yields with risk-free invest in e.g. 10-year government bond.

1. Pay bargain price for share: buy business with high earnings yield (higher return per share vs price).

2. Buy a good business: higher return on capital (can invest its own money at higher rates of return).

https://magicformulainvestinyig.com/

Selecting stocks:

1. Rank largest companies by return on capital, highest is 1
2. Rank them by earnings yield, highest is 1
3. Add the rankings
4. Select 20-30 of the top companies
5. Hold for around 1 year