Little Book That Beats the Market
From Morningstar.com today:
“What makes Greenblatt’s [book: The Little Book that Beats the Market] message valuable is its focus on investing as opposed to speculating. Investing involves risk, but it is not buying something with the hope that you’ll be able to sell it to someone else for a greater price later. Investing is financing the operations of a business, and it involves trying to understand if that business is healthy enough and profitable enough to give you an adequate return on your capital from its operations, based on the price you’ve paid for your interest in those operations. This is what Warren Buffett has called a “business” approach to investing, and it’s the one we favor at Morningstar both when we analyze stocks and when we evaluate the investment processes of mutual fund managers. Our stock analysts prefer free cash flow yield instead of earnings, as they believe free cash flow is a more accurate measure of the amount of cash that can be lifted out of a business without disturbing its operations. They also use something called a discounted cash flow analysis to value the stocks they cover, but the principles are the same as Greenblatt’s.”
Is it easier for the average person to wrap their arms around the idea of “financing the operations of a business” or simply trading based on daily price action? Is it more realistic for the average person to be an “investor” or “trader”? Thoughts on the subject? Email me.
