L'Art de Battre le Marché
A simple and powerful strategy to consistently beat the market.
L'union fait la force
This is the heart of the strategy. Instead of looking at a single indicator, we combine the ranking of price (EY) and quality (ROC). A low score means the company is both cheap and high-performing.
Magic Rank = Rank (EY) + Rank (ROC)The Two Pillars of the Formula
1. Earnings Yield (The Price)
This factor tells us how much profit we get for every dollar invested in the company. It's equivalent to the inverse of P/E, but adjusted for debt via Enterprise Value (EV).
2. Return on Capital (The Quality)
This factor measures how efficiently the company uses its capital to generate profits. We look for companies capable of turning $1 of capital into maximum earnings.
The Little Book That Still Beats the Market
First published in 2005, this book revolutionized value investing by simplifying it into a two-factor model accessible to everyone.
The Little Book That Still Beats the Market
by Joel Greenblatt
The 4 Steps of Investing
Define the Universe
Exclude micro-caps, utilities, and the financial sector.
Rank the Companies
All remaining companies are ranked separately by Earnings Yield and Return on Capital.
Combine the Ranks
Add both rankings to get the 'Magic Rank'. The lower the combined score, the better the opportunity.
Buy and Hold
Buy the top 30 stocks from the ranking and hold them for one year before rebalancing the portfolio.
"I'm not trying to be the smartest guy, just the most disciplined."
The Magic Formula doesn't work every month, or every year. But in the long run, discipline pays off.
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