You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market P by Joel Greenblatt

Chapter 1
FOLLOW THE YELLOW
BRICK ROAD—
THEN HANG A RIGHT

It doesn’t make sense that a book can teach you how to make a fortune in
the stock market. After all, what chance do you have for success when you’re
up against an army of billion-dollar portfolio managers or a horde of freshly
trained MBAs? A contest between you, the proud owner of a $24 “how to”
book, and these guys hardly seems fair.
The truth is, it isn’t fair. The well-heeled Wall Street money managers and
the hotshot MBA’s don’t have a chance against you and this book. No, you
won’t find any magic formula in chapter 8, and this isn’t a sequel to How to
Succeed in Business Without Really Trying, but if you’re willing to invest a
reasonable amount of time and effort, stock market profits, and even a
fortune, await.
Okay: What’s the catch? If it’s so easy, why can’t the MBAs and the pros
beat your pants off? Clearly, they put in their share of time and effort, and
while they may not all be rocket scientists, there aren’t many village idiots
among them either.
As strange as it may seem, there is no catch. The answer to this apparent
paradox—why you potentially have the power to beat the pants off the so-

called market “experts”—lies in a study of academic thinking, the inner
workings of Wall Street, and the weekend habits of my in-laws.
We start with some good news about your education: simply put, if your
goal is to beat the market, an MBA or a Ph.D. from a top business school will
be of virtually no help. Well, it’s good news, that is, if you haven’t yet
squandered tons of time and money at a business school in the single-minded
quest for stock market success. In fact, the basic premise of most academic
theory is this: It is not possible to beat the market consistently other than by
luck.
This theory, usually referred to as the efficient-market or “random-walk”
theory, suggests that thousands of investors and analysts take in all the
publicly available information on a particular company, and through their
decisions to buy and sell that company’s stock establish the “correct” trading
price. In effect, since stocks are more or less efficiently priced (and therefore,
you can’t consistently find bargain-priced stocks), it is not possible to
outperform the market averages over long periods of time. Although
exceptions (e.g., the January effect, small size effects and low price/earnings

You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market P by Joel Greenblatt