Originally Posted by pms163
He just looks for companies that are simultaneously "good" (quantified by high return on capital) and that are "cheap" (quantified by something similar to low price-to-earnings ratio).
The bid-ask spread issue may be significant because these "cheap" stocks are generally cheap because they're unpopular, which means thinly traded, which means higher-than-typical bid-ask spreads.
Let's use TH's gopher prairie dog again.
First, if this magic-formula method is so darn good, then why is the author (1) writing a book and (2) selling it? If the formula works then he'd be too busy making money (or spending it) to bother with the labor of crafting deathless prose. And if he really is making a ton of money, he could satisfy his ego just as elegantly by giving the book away. He could hand his first copies to Bill Miller, George Soros, Warren Buffett, Jim Cramer, Maria Bartiromo, Abby Joseph Cohen, Peter Lynch, William O'Neill, Robert Kiyosaki, and the rest of the investing pantheon.
Second, if this magic formula is so good, why isn't it subject to peer review in an accredited journal? All he has to do is lay out the process (without vague language like "magic formula" and "adjustments") and let the academic community form a concensus. If they can't independently arrive at the same results that he claims to have achieved, then we can send him over to the cold-fusion lab to help those guys.
Third, why do you need a "magic formula" if you're buying value companies? Just buy the darn value companies (via Vanguard or an ETF) and get on with the rest of your life, liberty, & pursuit of happiness. You'll probably beat the S&P500 (although that's not too hard) and you might even beat the return of the total market. Most investing disasters occur when taking a plan that's "good enough" and trying to make it "perfect".
The answers to your original questions are "No, I'm not paying money to read that stuff" and "Yes, it's a get-rich-quick scheme that's optimized for the author's net worth, not ours".