The Little Book That Still Beats the Market Ch. 6: Should You Actually Run It?

"The hard part of investing is not finding a good strategy but honestly assessing whether you can execute it." — the theme of this chapter

Investment Context

The first five chapters established what the formula is, why it works, and when it fails. One practical question remains: for a specific retirement investor, is running it rational?

Most investment books go quiet here, because the honest answer for most readers is no. This chapter lays out the full cost structure needed to decide.

The Wall Street Translation

1. Three Overlooked Costs

Backtested returns are gross. Execution deducts:

Taxes are the most underestimated item. The formula requires annual turnover, so gains are realised and taxed every year, whereas index fund gains can defer for decades. In a taxable account this difference alone consumes a substantial share of the excess return.

2. Account Placement Decides Feasibility

With sufficient tax-deferred space (IRA, 401(k)), the tax disadvantage largely disappears; restricted to a taxable account, the strategy's appeal drops sharply.

A common error is running the high-turnover strategy in the taxable account while holding low-turnover index funds in the IRA — precisely backwards.

3. An Honest Decision Checklist

Before committing any money, answer each:

• Can I leave this money untouched for at least five years?
• Can I sit through three consecutive lagging years without changing anything?
• Do I have tax-deferred space to run it in?
• Is this no more than 10% of total assets?
• Is my core already in low-cost broad index funds?

Any "no" means do not run it. The second is the hardest, and most people overestimate themselves on it.

4. A Frank Comparison With Simply Buying the Index

In later interviews Greenblatt made a frequently overlooked remark: for most people, buying and holding low-cost index funds is the better choice, because it demands no behavioural discipline at all.

This converges with the conclusion of A Random Walk Down Wall Street: the theoretical excess return of an active strategy is routinely erased by the behavioural losses of the person executing it.

Actionable Trading Rules

1. Build the core before considering satellites: Allocate nothing to the formula until low-cost broad index funds constitute the bulk of the portfolio.
2. Run it only in tax-deferred accounts: Without IRA or 401(k) space, drop the strategy — the tax drag in a taxable account makes it not worth doing.
3. Cap at 10% and write the rules down first: Before buying, put the rebalance date and exit conditions on paper so later decisions are not made on emotion.

Relevance to a Retirement Portfolio

The conclusion deserves to be stated plainly: for the great majority of retirement investors the correct answer is not to run the magic formula, but to hold low-cost broad index funds and rebalance periodically.

The formula's value is mainly educational — it teaches how quality and price jointly determine returns, why moats matter, and why patience is itself a scarce, compensated resource. Applying that understanding to the funds and stocks you already own will pay far more than actually executing the annual turnover.