Magic Formula Investing

Some people are constantly negative, it’s hard to be around with people that express nothing but gloom and doom. These cynical folks say the stock market is rigged and the small investor can never make a decent return, they have not heard of the success of the magic formula investing. But a man named Joel Greenblatt wrote an intriguing book and somewhat controversial book called The Little Book That Beats The Market, which is going to attract attention just based on that title. It is pretty assuming and sort of pretentious. Greenblatt is a part time or adjunct Columbia Business School instructor who proclaims a “value-oriented” method that emphasizes inexpensive equities whose stock price is insignificant compared to the firm’s profitability.

He has dubbed this the “magic formula” is what has sparked such an interest and has led to some unrest. It evaluates firms on the foundation of dual variables – the earnings yield and the firm’s return on capital. He has a website that basically performs this function for beginners. Greenblatt just does not spit this innuendo off and say sarcastically “if you cannot figure it out that is your problem.” He offers credible verification that is methodology is for real and genuine. However, he also maintains realism that there can be some short term volatility and discipline is requested. Greenblatt thoroughly believes his calculation is the real deal and his investment returns have been mighty. Therefore, the pen is mightier than the sword it seems. Some of his language in the books is a little too colloquial for some which may turn off some sophisticated investors or some people who are not taking the investing game very lightly since they are depending on their investments to sustain their retirement. However, Greenblatt’s apparently is. In addition, I sympathize with the group that takes investing serious since the way Congress is mismanaging social security, we need all the shrewd planning that we can muster.

Moreover, his explanations about business valuation, interest and risk are borderline goofy. His value-investing strategies are pretty normal though. Do not judge him based on his funny writing mannerisms when his investing acumen seems to be off the chart. Many investors who favor a little more interaction than the more conservative nature of a mutual fund are the unknown apostles of Greenblatt’s reckoning and investing proclamation.

There are some companies now that are mimicking this formula while giving Greenblatt his credit due. Apparently, Greenblatts methodology earned 31% return over 17 years. This beats Peter Lynch and Warren Buffett. This is stupendous, why is he not on more news channels. The magic formula listed on a website can root out the duds and enable you to easily identify the investments that carry the plague.

Alex Garcia is owner of Magic Formula Pro a Magic Formula Investing blog covering value investing.