The Big Secret for the Small Investor by Joel Greenblatt  - book summary

The "Big Secret for the Small Investor" is investing in a Value-Weighted Index.

Before we check his definition, let's show a little more about indexes firstIn this example we have 3 securities. Each security has a beginning price, an end price, a dividend and a total share outstanding numberFor indices, you can always have a price return where you don't include dividends, and a total return, where you do include the dividends.

Examples of indices:

Market Cap - S&P500 is a market cap index

Price Weighted - Dow Jones(DJIA) and Nikkei225

Equally Weighted -Russel FTSE 100 Equally Weighted Index is an example

Fundamentally Weighted Index - RAFI FTSE 1000 is an example

Ordering the Indices by highest to lowest return we get:

Equally weighted 11.39%

Market Cap 6.75%

Price Weighted 1.67%

Fundamentally Weighted Index

As an example there is the RAFI FTSE1000 Fundamentally Weighted Index. Companies are based on their economic size using measures such as sales, book value, cash flow and dividends. Using Greeblatt's example the returns are slightly better than the Equal Weighted Version, because overpriced stocks are given less weight, the index performance is better. Using Annual return of the S&P 500 Equal Weighted Index over trailing 20 years we get 11.8% for the Equally weighted version and 12.2% using the annual return of RAFI FTSE 1000 Fundamentally Weighted Index over trailing 20 years."

So far we conclude that Fundamentally Weighted Index(RAFI FTSE 1000) is the way to go.

Value Weighted Index

Greeblatt's proposition is an index he calls Value Weighted, where the idea is to keep buying more stocks when they are available at bargain prices, and continually rebalancing the portfolio giving more weight to stocks that are more undervalued than the rest.

Conclusion

So there you have it. If you want to invest through indices you can follow this order:

Value Weighted Index > Fundamental Weighted Index(RAFI FTSE 1000) > Equal weighted (FTSE100)>Price Weighted(DJIA)>Market Cap Index (S&P500)

You can get this book here.

Le't me know your comments.

Be great nothing else pays.

DM