Formula Investing With a Value Mindset

February 2, 2010 · Leave a Comment

On last year’s Value Investing Congress, Joel Greenblatt gave a presentation on his “Magic Formula” for investment success (slides can be found HERE)  Greenblatt suggests purchasing 30 “good companies”: cheap stocks with a high earnings yield and a high return on capital. He touts the success of his magic formula in his book “The Little Book that Beats the Market”, citing that it does in fact beat the S&P 500 96% of the time, and has averaged a 17-year annual return of 30.8% 

The process for the “Magic Formula” is as follows:

  1. Establish a minimum market capitalization (usually greater than $50 million).
  2. Exclude utility and financial stocks
  3. Exclude foreign companies (American Depositary Receipts)
  4. Determine company’s earnings yield = EBIT / enterprise value.
  5. Determine company’s return on capital = EBIT / (Net fixed assets + working capital)
  6. Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
  7. Invest in 20-30 highest ranked companies, accumulating 2-3 positions per month over a 12-month period.
  8. Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
  9. Continue over long-term (3-5 year) period.

Some of the companies passing the “Magic Formula” criteria at the moment are lsited below.

Categories: Analysis · Investing · Value Investing
Tagged: joel greenblatt, magic formula, Value Investing, value investing congress

0 responses so far ↓

  • There are no comments yet...Kick things off by filling out the form below.

Leave a Comment