I came across one of #JoelGreenblatt ‘s small finance books when I visited the library during the bank holiday yesterday. I read it in one sitting as it was both humorously written and contained actionable advice. His book, titled “The Big Secret For The Small Investor” was dated 2007, so it’s ample for back-testing. (If you want a book review, you came to the wrong place)

Beyond carefully picking a group of undervalued stocks with high earnings and return on capital, Greenblatt shares his realizations about the restrictions and career defying challenges a portfolio manager faces. The small investor, relieved from the pressure to beat a benchmark on a quarterly basis, can capitalize on patience and be oblivious to money trends. (This time arbitrage is often the biggest hurdle for active traders that are bombarded with news and investment impulses.)

Even back then regulatory hurdles limited large financial institutions ability to invest in small cap stocks, which Greenblatt suggested gave the small investor an additional edge. Surprisingly, he does not mention the even bigger edge the small investor has in liquidity (most large financial institutions can not, and will not, sit temporarily in all cash even if they believe their assets will lose value in the short term).

Based on available data in 2007, Greenblatt also points out how market cap weighted indices (such as the SP500) have underperformed equally weighted indices. Therefore, and contrary to the modern average financial advisor, he advocates investing in for instance the Rydex S&P Equal Weight ETF (symbol: RSP) instead of a market cap weighted SP500 index ETF. With the luxury of hindsight, we can however see that this trend has not continued. The RSP has soared – but… if the SP500 was the benchmark, then RSP failed. Greenblatt has probably changed his view since then. The world has changed. Mom and Pop stores continue to close and general business is concentrated to fewer international companies. The market cap weighted indices are increasingly dominated by fewer companies. (For some reason this has caught a lot of financial analysts by surprise. Magnificient 7 anyone?).

#BenjaminGraham and #WarrenBuffet are of course mentioned in the book as the theme is centered around the principals of value investing. As usual, there is no mentioning of Other People’s Money even though Greenblatt underlines the benefit of a small investor not having to take calls of disgruntled clients. Let me end with this last thought: The financial success of Graham, Buffet and Greenblatt is not a result of stock picking. Obviously, a small investor will become rich, but not as wealthy as they are by taking their advice to invest in RSP or the SP500. Their fortunes were made by convincing other people to invest in their financial vehicles. That’s the real big secret.