Summary : The Big Secret For The Small Investor – Joel Greenblatt

Investing in small stocks still has some major advantages over investing in larger-cap companies. These stocks, because of their smaller size, are subject to less research from both institutional and individual investors. Consequently, they are often more likely to be mispriced by the market than larger capitalization stocks

But weighting companies based on how cheap they appear relative to sales, book value, an average of the last several years of earnings, or other factors would also be perfectly valid methods. For what we’ll call our value-weighted index, the cheaper a company appears, the more we’ll own of it. In this way, maybe we’ll be able to create an index that is systematically over weighted in companies where expectations are low and where there is a good possibility that an emotional Mr. Market has sold the shares down to bargain levels.”

The more assets a mutual fund has, the more money its managers make. That means mutual fund managers have an inbuilt incentive to grow bigger rather than to maximize returns for their current investors

looking in the right places

When it comes to the stock market, investors who are willing to do a little work have plenty of ways to gain an advantage by simply changing the game. They can manage smaller amounts of money (millions as opposed to billions), research some of the thousands of smaller companies where there is less competition, concentrate their portfolios in just a few investments where they have the most knowledge and confidence, and invest in special situations where the advantage comes mostly from just