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Magic Formula Investing

Magic formula investing is a value-based investment strategy developed by Joel Greenblatt that focuses on buying stocks of companies with high earnings yields and high returns on capital. The formula is designed to identify undervalued stocks that are likely to outperform the market. Investors using this strategy typically screen for companies with strong financial metrics and hold a diversified portfolio of such stocks for the long term.

Example

An investor following the magic formula investing strategy selects stocks with high earnings yields and high returns on capital from a stock screener, building a portfolio of undervalued companies.

Key points

• A value investing strategy focusing on stocks with high earnings yields and high returns on capital.

• Developed by Joel Greenblatt to identify undervalued companies likely to outperform.

• Involves holding a diversified portfolio of strong-performing stocks for the long term.

Quick Answers to Curious Questions

The goal is to identify undervalued stocks with high earnings yields and strong returns on capital, aiming for long-term outperformance.

Magic formula investing focuses on specific financial metrics—earnings yield and return on capital—whereas traditional value investing may use broader criteria.

The strategy was developed by Joel Greenblatt, an American hedge fund manager and academic.