You can discover what your enemy fears most by observing the means he uses to frighten you. – Eric Hoffer
When it comes to value investing, uncertainty and impatience is our greatest enemey to miss out on some great returns. After analyzing a company and thinking your judgment is correct, why bail out? If nothing change with the companies fundamental / foundation, wh give up and if you bought with a margin of safety, if you were to find something really awful about the company, you should still leave with a little bit of profit. Maybe not as much as your projected but hey, it is still something.
Remember what I said about practice and training wheels for investors who are trying to learn about picking stocks and being the next Buffett or Lynch?
The author of The Little Book that Beats the Market by Joel Greenblatt does an excellent job on reiterating the main points of his magic formula, buy companies with high return on capital / assets and high earnings yield (E/P).
The Columbia’s adjunct lecturer, Mr. Greenblatt, states his objective of the book right away in a very simple, intellectual manner. He also says this “magic formula” does have flaws, in the sense that you may not see positive numbers right away, or a jump of 10% in that given year, but that’s what makes the formula “good.”
A lot of us do not have the patience to wait for the results, therefore we are willing to abandon something that does not give us instant gratification. So the less people who thinks the magic formula work, the more of an opportunity we, the true value investors, have applying this strategy. As the author said himself, it may be hard to replicate “the exact same” results he did, but Joel Greenblatt is just demonstrating in a very simple manner how to distinguish which cheap stocks are good business and are worthwhile to own.
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