Greenblatt's First Formula Has Plenty of "Magic", Too

Hedge fund guru Joel Greenblatt is known for the “Magic Formula” approach that he laid out in his Little Book That Beats The Market. But more than two decades before that, Greenblatt detailed another strategy that may have even more magic in it, according to ValueWalk.

“In 1981, at just 24 years old, Joel Greenblatt teamed up with Richard Pzena (a great value investor in his own right), and Bruce Newberg to test their own version of [Benjamin] Graham’s [net current asset value] investing approach,” Net Net Hunter writes. “The result was a fantastic research paper called,How the Small Investor Can Beat the Market: By Buying Stocks That Are Selling Below Their Liquidation Value.”

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Greenblatt’s strategy tweaked Graham’s approach of targeting companies trading for significantly less than their net current asset value by also making sure the stocks traded for less than five times earnings. The result:
While the broader market was about flat during the August 1973 to April 1978 period Greenblatt examined, Greenblatt’s approach earned over 42% compounded per year.

Net Net Hunter says that performance means Greenblatt’s original formula may well be more impressive than Greenblatt’s Little Book formula. He also looks at a number of different ways that investors can implement variations of Greenblatt’s formula.

Validea’s Joel Greenblatt-inspired portfolio is up 11.1% annualized since its late 2005 inception vs. 5.2% for the S&P 500. Check out its holdings here.