Will this simple “Magic Formula” beat the S&P 500 over the next decade??

Beating the market is in theory very simple: all you have to do is identify a good business... trading at a bargain price.

As practical as “buy low and sell high” right?!

Not necessarily... how you can actually do it may well be as simple: Joel Greenblatt, star hedge fund manager of Gotham Capital, shared in “The little book that beats the market” an extremely simple and rule-based “magic" formula to pick the stocks that should over-time outperform the market:?

Find a good business...

He defines good businesses as ones with high returns on invested capital, which he defines as EBIT ÷ (Net Fixed Assets + Working Capital). Those businesses are likely to have a unique advantage over their competitors - what Buffet defines as an economic “moat”. That should in turn enable them to maintain high margins and preserve their market share, translating into stable and positive earnings growth over time.?

….trading at a bargain price?

Don't just buy a good business, buy one that is cheap too. And the higher a stock’s “earnings yield”, which Greenblatt’s defined as EBIT / EV, the better. Using EBIT / EV has an advantage over the more commonly used E / P: it’s not as influenced by the firms' capital structures and tax rates, making it easier to compare different businesses.?

What next? All you have to do is rank stocks based on both metrics, buy the stocks with the highest combined rank, and hold them for a year.?

Can investing be that simple? Does the “magic formula” really work in practice?

Check out the article I wrote for Finimize (link in the first comment below) to know my thoughts and feel free to share yours below!

And of course, if you have a better value metric, share it too!