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.
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Greenblatt: Large Caps Looking Better Than Small Caps

Standout hedge fund manager Joel Greenblatt says his “Magic Formula” is finding more value in large-cap stocks than small caps right now. Greenblatt told CNBC that, based on a review of decades of history, he’s finding that large-caps are in the 38th percentile towards expensive right now, meaning they’ve been cheaper than they are now 62% of the time over that several-decade span. From these levels, stocks on average have gone on to gain between 6% and 10% over the next year, he says. Small caps, however, are in the 5th percentile, meaning they’ve been cheaper 95% of the time. Such levels have historically led to average returns of -3% over the ensuing year. Greenblatt notes that those valuations involved averages, and that there are individual stocks trading for much cheaper. He also talks about his strategy, and how the “Magic Formula” works.

Validea’s Joel Greenblatt-inspired portfolio is up 113% since its late 2005 inception vs. 41% for the S&P 500. Check out its holdings here.

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