In Ch.2 of The Little Book that Beats the Market, Joel Greenblatt briefly touches on saving money and the importance of investing some of your savings. He also teaches us not to spend or waste money on things we don’t need such as whoopee cushions. I’m actually happy Greenblatt briefly touches on personal finance a bit as it plays a huge role in everyone’s lives and its actually the reason I pulled my money out of the market twice. To keep things short, I decided to pay off debt in order to be able to save and invest for the long term without having to worry about short term finances.
Greenblatt mentions several options you can do with your money such as saving money in the bank, buying U.S. Treasuries, or Corporate Bonds. Of course, each one of these options come with their own risk and reward. Consider U.S. Treasuries which are “risk free”. While you are guaranteed to get your money back, it doesn’t make sense to lend the U.S. Government for 10 years and only receive a 2% return (March 2013). At the same time, several large multinational companies have a higher dividend yield than the 2% on a 10 year. For example, with a current price of $78 and a annual dividend of $2.40, Johnson & Johnson (JNJ) currently offers a dividend yield of 3%+. Not too mention, its balance sheet is rated AAA, which means the company isn’t going bankrupt anytime soon.
Finally, thinking ahead, Greenblatt makes a note that when the yield offered by the 10 year Treasury is below 6%, we will use 6% as our default required rate of return. If Treasury’s are north of 6%, for example 8%, we shall use that number are our required rate of return.
Disclaimer: None
This article is part of The Little Book that Beats the Market Review series. Author Joel Greenblatt, is a noted value investor and a professor at Columbia’s business school. Greenblatt is also founder and managing partner of Gotham Capital.
