When Joel Greenblatt introduced the Magic Formula, he revealed something remarkable: this strategy averaged a 33% return per year over 16 years. That's more than double the market's return! These results weren't a fluke. They reflected a core truth about investing—focusing on quality and value works.
However, contrary to its name, there's nothing magical about the magic formula, and it may not always be the best strategy. Some market tests of the formula have found lower-than-expected returns, possibly due to changing market dynamics or the increased number of investors following Greenblatt's method.
Stockopedia explains Magic Formula Score
An overall ranking for each stock is created by combining the rank of a company's Return on Capital vs the market (its quality) with the rank of its Earnings Yield (its cheapness).
The magic formula investing strategy is based on a simple principle: buy good companies at good prices. It uses two key financial metrics to identify these companies: return on capital (ROC) and earnings yield (EY).
MAGIC FORMULA OF ATTITUDE
In a nutshell, it is your 'Attitude' which determines success. You can achieve only what you think you can achieve. The attitude towards life – the strength of character of getting up after a fall, dusting yourself and starting afresh once again – determines how successful you become.
Some common success metrics include revenue growth, customer acquisition and retention rates, profit margin, market share, customer satisfaction, and employee productivity. These metrics can provide a comprehensive view of your company's performance in different areas.
Determine company's earnings yield = EBIT / enterprise value. Determine company's return on capital = EBIT / (net fixed assets + working capital). Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
What Is the Magic Investing Formula? Screening stocks using the magic formula method is based on a rankings system. As developed by Greenblatt, this system uses three distinct criteria to rank companies: earnings before interest and taxes (EBIT), earnings per share, and return on capital.
The Magic Formula y(x) typically produces a curve that passes through the origin x = y = 0, reaches a maximum, and subsequently tends to a horizontal asymptote.
He has reportedly been successful with the investments that he manages for his own funds; however, his stock picks disseminated to the public on-air have tended to underperform the broader market.
What is the safest investment for 1 million dollars? The safest way to invest $1 million is to split the money between savings accounts to keep the money fully FDIC insured or to buy U.S. Government bonds. Each account has a limit of $250,000, so you'll need four accounts.
6-Month Price Index is an intermediate-term momentum that shows the price change relative to 6-month ago. The investment strategy for momentum investors is to buy winners and sell losers.
In Joel Greenblatt's current portfolio as of 2024-09-30, the top 5 holdings are SPDR S&P 500 ETF Trust (SPY), Gotham Enhanced 500 ETF (GSPY), NVIDIA Corp (NVDA), iShares Core S&P 500 ETF (IVV), Apple Inc (AAPL), not including call and put options. Joel Greenblatt did not buy any new stocks in the current portfolio.
Earnings yield is the 12-month earnings divided by the share price. Earnings yield is the inverse of the P/E ratio. Earnings yield is one indication of value; a low ratio may indicate an overvalued stock, or a high value may indicate an undervalued stock.
A coffee can portfolio is a long-term bet on certain stocks that have extremely good promoter lineage, have consistently performed over the years, have a long runway for growth and are backed by good management to name a few.
To calculate the Magic Formula ranking companies are ranked based on ROIC (with 1 being the highest ROIC) and earnings yield (where 1 signals the highest earnings yield).
1. Nature-Based Magic. The first type of magic system is also the most common. Though often parsed out into their own ecosystems, nature-based magic systems are those which manipulate the forces and elements of nature.
Magic Formula tire models
Pacejka developed a series of tire design models during his career. They were named the "Magic Formula" because there is no particular physical basis for the structure of the equations chosen, but they fit a wide variety of tire constructions and operating conditions.
The magic formula is a stock-picking strategy based on two financial metrics: earnings yield and return on capital (ROC). The strategy focuses on buying good companies at bargain prices, similar to Warren Buffett's approach, but Greenblatt simplifies the process into an easy-to-follow method.
The result is an easy-to-follow process that relies on two simple rules: Seek out companies with high return on invested capital (ROIC) and those that can be purchased at a low price that provides a high pretax earnings yield. These two concepts—buying a good business at a bargain price—make up the “magic formula.”
Instead, success should be measured by our impact on others, the memories we have created, and the personal development we have experienced. Success isn't just about how much you have or what you've achieved — it's about how you live your life and your impact on those around you.
Metrics look at the performance of specific processes, while KPIs track progress towards your most important goals. Metrics usually follow an industry standard, threshold, or benchmark, whereas KPIs are typically set by the business depending on the objectives.