Comments on: Exploring Greenblatt’s Magic Formula

By: Book Review: Quantitative Strategies for Achieving Alpha

Book Review: Quantitative Strategies for Achieving Alpha — Tue, 10 Jan 2012 21:25:42 +0000

[...] chapter. There are no secret or ambiguous steps to his stock screens. I was never able to replicate Greenblatt’s Magic Formula (and I haven’t seen anyone else replicate his backtest results), but I feel confident that I can [...]

By: Olivier

Olivier — Wed, 27 Jul 2011 18:24:31 +0000

Screeners work really well, certainly in volatile times like this it's the best way to cut out the emotions and find stocks with a wide margin of safety. If you combine Greenblatt's formula with other techniques such as the Piotroski score you can get even greater results. Greenblatt Magic Formula GreenBlattMagic Formula and Piotroski F-Score

By: Olivier

Olivier — Sat, 16 Jul 2011 10:05:44 +0000

We backtested the magic formula on European stocks and it performs great, however other less well-known formula’s such as Piotroski works better. We’ve done quite some testing on this and the results can be found on http://www.value-investing.eu/.....erformance

By: CP

CP — Fri, 12 Mar 2010 20:45:31 +0000

AJ-

Had the book for a while but just got the chance to pick it up a few days ago.

I agree that a safe, minimal check of the MFI spit-outs is a smart idea, and that can be found just checking the ROC: EBIT/(Net Working Capital + Net Fixed Assets) and EBIT/Enterprise Value, which can be found on major financial websites. I am very wary, as an inexperienced, young investor of probing too much further into further screening (remember the suspension of disbelief is probably the most important aspect in maintaining dedication through thick and thin)

And this may be a dumb question in lines with some of the other Greenblatt over-analyzing and “heresy” as previously described, but does the current recession bear any weight in the reliability of the MFI screening? I would think not as it analyzes inherent value, but i also recognize that this book was published before the market crashed.

By: AJ

AJ — Sat, 13 Feb 2010 05:58:10 +0000

Hi,

I am new in the area of investing but am pretty fascinated by the MFI. Can someone give a simple method on how to get the data needed to verify the ranking of the companies oneself – how does one go about getting the ROC and Earnings Yield and doing this ranking? Also, to someone’s earlier question, has someone verified this by running the data him/herself and matched it with the MFI data?

Thanks!

By: magic formula investing | Money World Channel

magic formula investing | Money World Channel — Fri, 31 Oct 2008 01:54:56 +0000

[...] Formula Investing The Motley Fool Discussion Boards: The Best Financial Community on the Web. Exploring Greenblatt€s Magic Formula Jan 24, 2006 … I€ve decided to take a closer look at how the Magic Formula works in the [...]

By: Fat Pitch Financials Turns 4

Fat Pitch Financials Turns 4 — Mon, 18 Aug 2008 11:53:39 +0000

[...] Exploring Greenblatt’s Magic Formula [...]

By: Paul

Paul — Sat, 16 Feb 2008 15:30:46 +0000

I just did a simple look using yahoo to see year to date for the January stocks 2006 listed at the top. Not one of the listed has beaten the Dow and many are more than 50% down. For example:
http://finance.yahoo.com/q/bc?.....8;c=%5EDJI
Depressing.

By: Fubu

Fubu — Wed, 14 Mar 2007 05:06:13 +0000

it just may be possible

By: Randy Harmelink

Randy Harmelink — Tue, 20 Feb 2007 04:15:47 +0000

Someone on the MFI Yahoo Group that did some research on stop losses found that dropping the big decliners actually lowered the overall return because many bounced back strongly. It seemed to imply that cost averaging down might be a good tactic to use on MFI stocks, at least overall.

http://finance.groups.yahoo.co.....038;tidx=1
http://justadrone.blogspot.com.....sight.html

By: Keenan Davis

Keenan Davis — Sat, 27 Jan 2007 23:06:14 +0000

I have used the Magic Formula for over a year now. In January 2006, without doing any further research, I bought 20 stocks from the Magic Formula $50mm cap list. The majority of those 20 were in the >100% Return on Capital category; most were in the double digit Earnings Yield category. (Not quite a dart board approach, but almost.)

Results: 11 winners and 9 losers. The 11 had very substantial gains; the 9 losers were absolute dogs. Net profit: greater than 30% return overall, much greater. The biggest scorers were NUE, MVL, UST, HOG. Others like CBS, EGY and HNR were marginally cool.

The performance of my 9 uncany canines (among others: DLX, CECO, KG, VCI, JAKK, BSX) continues to bug me, so I have done additional research on this year’s picks and I have developed losing stop loss and trailing stop loss criteria, rather than just blindly holding for a year. I know that’s heresy from the Joelian MFI doctrines, but paraphrasing Robert Frost, I can’t resist “holding history and heresy in fruitful tension.” One of my other departures was to buy all of the 20 in January, rather than spacing them over months, as Joel suggests. Thank you Joel (and Benjamin Graham, too).
Keenan Davis

By: Top 10 Fat Pitch Financials Posts of 2006 - Fat Pitch Financials

Top 10 Fat Pitch Financials Posts of 2006 - Fat Pitch Financials — Tue, 02 Jan 2007 16:15:15 +0000

[...] Exploring Greenblatt’s Magic Formula [...]

By: Hendrik Oude Nijhuis

Hendrik Oude Nijhuis — Fri, 22 Dec 2006 17:05:11 +0000

Hi,

I believe the results of Greenblatts’ MF-screen won’t be that good in the coming years. This because of the (unexpected) rise of commodity prices in the last years. These have led to high ROIC’s and EY’s for these kind of companies, which make them likely candidates in the screening process.

Because of the lack of (durable) competitive advantages, their returns won’t be that good, and will drag down the returns of the whole MF-selection,

Hendrik Oude Nijhuis
http://www.magicformulastocks.com

By: Pascal

Pascal — Thu, 16 Nov 2006 14:12:10 +0000

I have a question about the ROC (return on capital) metric used by Greenblatt. If you use Greenblatt’s site for the top 25 companies with a market cap > $100M, you’ll get a lot of companies with a ROC > 100% which I cannot understand. Let’s take PALM as an example. You’ll find PALM’s balance sheet there:
http://finance.yahoo.com/q/bs?s=PALM
If you take EBIT = 125M, net working capital = 453M, fixed assets = Property, Plant, Equipment= 83M, your ROC is equal to 23%, nowhere near 100% that Greenblatt seems to find? (I took Balance sheet figures as of 31-May-06 and yearly EBIT for the last 4 quarters as of 31-Aug-06)
Can someone help me and tell me what figures you take for EBIT, net working capital, and fixed assets to find a ROC > 100% ???
Many thanks in adavance,

Pascal

By: Wim

Wim — Wed, 02 Aug 2006 14:15:20 +0000

I’ve read a report from a big US broker lately on the same idea. They only implemeted a market neutral long / short strategy. They screened the MSCI Europe index for low EV/EBITDA (personaly i too find these better then P/E) and high ROCE. These stocks they put in the long list, the other way around for the short list.

They backtested this model from 1990 till 2005 and the results were remarkably. We see only 11 years on 16 with a positive result for the long portfolio. On average it showed 6% profit pro year. This far from the results of 30% acclamied possible with this model.

On the other hand the short portfolio showed a negative result in 13 on 16 years , with an avarage of -9%. So much more profitable then the long portfolio. Together with the long portfolio this model showed a positive result in 15 out of 16 years of on average 15% pro year.

My conclusion from this study is that it seems to work out better the other way around as the “worst” list performs 9% and the long list performs only 6% …

By: CHUCKSTER

CHUCKSTER — Tue, 01 Aug 2006 12:56:35 +0000

RG made enormous mistake with Ford. It’s not right to make assertions and be so careless.

By: birde

birde — Tue, 25 Jul 2006 21:58:34 +0000

Very needed information found here, thank you for your work

By: Magic Formula Performance to Date - Fat Pitch Financials

Magic Formula Performance to Date - Fat Pitch Financials — Tue, 25 Jul 2006 12:17:16 +0000

[...] One of the readers here at Fat Pitch Financials revisited one of my original posts on Joel Greenblatt’s Magic Formula. The Magic Formula is detailed in Greenblatt’s latest book, The Little Book That Beats the Market and daily updates of the stocks selected by the Magic Formula can be obtained from MagicFormulainvesting.com. [...]

By: RG

RG — Mon, 24 Jul 2006 22:57:24 +0000

I just ran a quick test of the stocks listed in the Jan 24 column. The Magic Formula is down 5.55% from 01/24/06 to 07/24/06. The Russell 2000 is down 6.41% and the S&P500 is down 0.47% during the same time period.

Ticker 1/24/2006 7/24/2006
AEOS 25.39 33.34 31.31%
ANIK 10.5 9.86 -6.10%
HRB 24.9 23 -7.63%
CALL 4.79 3.53 -26.30%
CATT 14.55 9.98 -31.41%
CLCT 15.07 12.38 -17.85%
DLX 28.4 13.57 -52.22%
FORD 10.55 6.05 -42.65%
FTD 10.02 14.86 48.30%
GBEL 11.95 8.6 -28.03%
INSP 23.7 22.02 -7.09%
ISSC 14.01 16 14.20%
IVII 10.99 8.86 -19.38%
JAKK 22.57 17.04 -24.50%
KSWS 31.32 23.55 -24.81%
KG 17.99 17.09 -5.00%
KFY 19.34 18.38 -4.96%
KOSP 45.17 39.27 -13.06%
MGLN 33.85 44.15 30.43%
MTEX 13.84 13.39 -3.25%
MVL 16.5 18.03 9.27%
NOOF 6.49 6.76 4.16%
UNTD 14.48 10.77 -25.62%
EGY 5.77 8.61 49.22%
VTRU 38.22 43.65 14.21%

Average 18.8144 17.7096 -5.55%

S&P 500 1267 1261
-0.47%

Rus 2000 718 672
-6.41%

By: Gabe

Gabe — Thu, 20 Apr 2006 15:30:11 +0000

Although the magic formula is a good startbefore purchasing stocks you should do research to see if the stock will go up. The formula is agood toll to narrow down stocks so you can pick the few you want to use. I will do research on 10 stocks and buy the top 10 i pick which I think should grow. Not all stocks that make the magic formula criterion are going to give you a magically high profit in the future.