Does Joel Greenblatt's Magic Formula Still Outperform the Market in 2024?
— Dusty
Hello everyone, it's been a while.
I recently went through a pile of old books and found my copy of Joel Greenblatt's, "The little book that STILL beats the market".
This version of the book was released in 2010, as an update to the original from 2006, to prove that his Magic Formula can still outperform the market. I asked myself, but what about in 2024? How would this formula hold up another 14 years later? So I put it to the test...
What is the Magic Formula?
Just a little background for those of you who aren't familiar with this formula or the world of stock investing. Joel Greenblatt's Magic Formula is a simple investment strategy designed to help people pick stocks that are both cheap and high-quality. It’s based on two main ideas:
- Earnings Yield (EY) : This measures how much profit a company makes compared to its price. A higher earnings yield means the stock is relatively cheap for the amount of profit it generates.
- Return on Capital (ROC): This measures how efficiently a company uses its money to generate profits. A higher ROC means the company is good at turning its investments into profits.
The Magic Formula ranks companies according to both of these factors and then combines both the rankings for each company. All of the companies are then ranked by their new combined rankings which aims to identify the companies that are both cheap (high earnings yield) and high-quality (high ROC). The idea is to buy stocks that score well in both areas and hold them for about a year before re-evaluating. Over time, this strategy is designed to beat the market by investing in undervalued yet profitable companies.
Where can I find a list of Magic Formula companies?
Well, in Joel's book he mentions that he has a website(magicformulainvesting), which will do all the calculations for you.
However, upon visiting this website in 2024 and trying to register a new account, I found that it was broken. While it would let me register my account, upon trying to activate my account it would say my password did not meet the complexity requirements (even though it did when I registered).
Due to this issue, I decided to make my own version:
New Magic Formula Investing Tool
I created this automated Magic Formula Investing Tool which automatically pulls the company's financial data for the 5000 largest companies in the NYSE and NASDAQ. It then automatically calculates each companies' ROC and EY and then calculates the combined ranking for the final result.
The tool also allows you to sort the data by different metrics and also to filter out Financial & Utility companies which Joel mentions in his book to avoid when using his formula.
Results
As you can see in the embedded widget below, I have a selection of 50 stocks from my Magic Formula Investing Tool which I will be holding for the next 12 months to see if this formula can still beat the market. While I am currently up 2.5-3% after 1.5 weeks you will need to come back after 1 year to see the full results!
Key Info:
- Total Invested: £50,000 / $66973.25 Paper Money (£49,925 / $66872.79 after fees)
- Total Invested/Stock: £1,000 / $1339.46 Paper Money (£998.5 / $1337.46 after fees)
- Buy Date: 16th September 2024
- Sell Date: 16th September 2025
Also note, the widget's "Buy Price" for each stock is slightly incorrect and varies from anywhere between a few cents to $3 depending on the stock. This is because this free portfolio widget did not let me enter my specific buy price and instead just applied the average buy price of each stock on the date of my purchase.
If you are interested, the full CSV for this investment portfolio can be downloaded here:
Disclaimer
The information provided by this post and the mentioned tools is for informational purposes only and does not constitute financial advice. The Magic Formula strategy and the data used to rank stocks are based on historical performance and certain financial metrics, which may not be predictive of future results.
Please note the following:
- No Warranty or Guarantee: While every effort is made to provide accurate data, the tool pulls live financial data from third-party sources, which may contain inaccuracies, omissions, or delays. The rankings and results are provided "as is" without any warranty or guarantee of completeness or accuracy.
- Investment Risks: Stock market investments involve risks, and the past performance of stocks based on this tool does not guarantee future success. Users should do their own research or consult with a licensed financial advisor before making any investment decisions.
- Liability: The creators of this tool and the hosting platform are not responsible for any financial losses or damages that may result from using the information provided by this tool.
By reading this post and using my tools, you acknowledge and accept that it is your sole responsibility to assess the suitability of the information for your investment strategy.