Jan. 13 (Bloomberg) -- In an age that celebrates passive index investing, the hottest new book in financial circles takes the opposite side of the argument.

We're talking about ``The Little Book That Beats the Market,'' by hedge-fund manager Joel Greenblatt, a $19.95 volume from John Wiley & Sons that has jumped right up there with the likes of ``Your Best Life Now'' and ``The Chronicles of Narnia Boxed Set'' on best-seller lists.

No, no, you can't beat the market, the indexers always tell us -- it's a ``random walk'' since everything that can be known or surmised about a stock is already built into its price. Greenblatt says he hopes to see ``a random walk spoiled.''

If his premise is simple, the promises that have been heaped up around it are extravagant indeed. ``It provides a `magic formula' that is easy to use and makes buying good companies at bargain prices automatic,'' the dust jacket declares.

And what is this secret? In Greenblatt's own words, it is to ``find above-average companies that we can buy at below- average prices.'' Above-average companies are identified by high returns on capital. Below-average prices are identified by high earnings yields, which is another way of saying low price- earnings ratios.

Promises, Promises

Back to the come-ons on the cover: ``You can achieve investment returns that beat the pants off even the best investment professionals and the top academics. In fact, you can learn how it's possible to more than double the annual returns of the stock market averages.''

``But there's more. You can do it all by yourself. You can do it with low risk. . . Best of all, once convinced that it really works you can choose to do it for the rest of your life.''

Wow! Investing was never this easy. Veterans of the game have seen such claims before, and long ago learned to view them with a skeptical eye.

One thing that sets this volume apart is endorsements by no less than hedge-fund hero Michael Steinhardt, legendary mutual- fund manager Michael Price, and Prof. Bruce Greenwald of Columbia Business School, among others.

Real People

Let's not judge a book by its cover. Let's look at what ordinary readers have to say about it. Simple as the book's basic idea may be, the reaction to it has been quite, well, complicated.

``Excellent!,'' said the first reader review I perused on the Web site of bookseller Amazon.com Inc. ``This is a fairy tale,'' sneered the second.

``Great insight into investing,'' said a third. ``Very disappointing,'' said another. ``An easy quick read, some good points, some big problems,'' summed up the last comment I checked.

One intriguing aspect of Greenblatt's case is the way he deals with the nagging question of how any market-beating system, no matter how good, can keep working once it is popularized. After all, if some investors are going to beat the market, there must be others who get beaten.

``The magic formula appears to work very well over the long term,'' Greenblatt writes. Even so, he says, its history shows it may produce sub-par results for shorter periods of a year or two.

Patience

``Most people just won't wait that long,'' he says. ``Their investment time horizon is too short. Even professional money managers who believe their strategy will work over the long term have a hard time sticking with it.''

Hmmm, everyone won't do this because many will find it too hard. So much for the dust-jacket claim that ``successful investing can be made easy for investors of any age.''

Greenblatt delivers admirably on some other promises. The book can indeed be read in two hours or so. It is good-humored throughout, and it contains one of the clearest, most entertaining explications you'll ever see of the ideas underlying value investing.

I plan to pass it along to people close to me who struggle to understand investing and the markets. It's that readable.

At the same time, I plan to tell them I regard the whole idea of beating the market as a red herring, defined by the American Heritage Dictionary as ``something that draws attention away from the central issue.''

Pertinent Question

Beating the market is, at best, a misguided goal for most individual investors. When a child's college tuition comes due, it matters not a whit whether you beat the market or not. The only pertinent question is, do you have the money to pay the bill?

Real-life investment plans should be geared to such real- life goals, with careful attention to risk as well as reward --- not to an abstraction like beating the market. That's for professionals, and for people who invest as an ego-driven sport.

I also plan to urge my near and dear ones to pay closest attention to the parts in which Greenblatt talks about what makes investing not so easy after all. That would include Chapter 12, in which he states, ``When it comes to Wall Street, there ain't no tooth fairy.''

To contact the writer of this column: Chet Currier in New York currier@bloomberg.net.

Last Updated: January 13, 2006 00:03 EST