The Little Book: That Still Beats the Market

Chapter 6. Chapter Six

SO WE'RE READY FOR the magic formula! Of course, you're still probably thinking it won't work or it'll be too hard or there's something wrong with a book that even claims to have a magic formula. But if it makes you feel any better, even the great Benjamin Graham, one of the most respected and influential pioneers in the investment field, the man who introduced us to the concepts of Mr. Market and margin of safety, wrote about and used a magic formula of his own. Okay, so he didn't really call it that (apparently, the man had some dignity). But Graham felt that most individual investors, and even many professional investors, would have a hard time making the type of predictions and performing the level of analysis necessary to value and invest in businesses on their own. Graham figured that by sharing a simple formula, one that made sense and had worked well in the past, individual investors would be able to achieve excellent investment results with a high degree of safety.

Graham's formula involved purchasing companies whose stock prices were so low that the purchase price was actually lower than the proceeds that would be re ceived from simply shutting down the business and selling off the company's assets in a fire sale (he called these stocks by various names: bargain issues, net-current-asset stocks, or stocks selling below their net liquidation value). Graham stated that it seems "ridiculously simple to say" that if one could buy a group of 20 or 30 companies ...