Written for his kids and fun to read. Hidden in the simplicity is a simple truth of how to systematically outperform the market.
Buy good businesses add a cheap price offered by a short term irrational Mr. Market.
Mr. Market is sometimes irrational in the short term but finds the right price in the long run.
To find the best opportunities at the moment two factors are key:
1. Earnings yield (EBIT/EV) or pricing - Cheap business
2. Return on capital (EBIT/(Net Working Capital + Net Fixed Assets)) - Good business
3. Rank the stock universe from bottom to top for both criteria and simply add up both ranking numbers to get to the overall score (exclude utilities, financial companies, insurance companies)
4. Write Joel a thank you letter! He has done all the work for you and you can pick the stocks directly from
5. Buy a basket of 20-30 stocks and hold the stocks for a year - the small cap universe offers more opportunities as it is more inefficient
6. Sell losses a few days before the year to generate tax losses
7. Stick to the strategy for at least 3-5 years and you will beat the market
obviously returns are still correlated with the market
8. Only pick individual stocks and not a basket if you really can do the valuation work and know what you look for! You will have a hard time to beat the above anyway...
"Choosing individual stocks without any idea of what you are looking for is like running through a dynamite factory with a burning match. You may live, but you are still an idiot."