Why the Magic Formula no longer works

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The Magic Formula Investing Strategy was published by Joel Greenblatt in his book "The Little Book That Beats The Market" and the updated version "The Little Book That Still Beats The Market." In this video, U discuss why the magic formula screen no longer works and has delivered somewhat disappointing returns between 2005 and 2020. I will explain why the magic formula investing approach has weaknesses and discuss whether the formula is broken.

In the book “The Little Book That Beats the Market”, we can find a table which illustrates that an investor that stuck to the magic formula investing strategy for 17 years, would have achieved an annual return of 22.9 percent. But ever since the book was published, returns have been less impressive.

The American Association of Individual Investors shows that the Magic Formula strategy “only” delivered an annualized rate of return of around 6% ever since Greenblatt’s book was published and thus underperformed the S&P 500 and other benchmarks by quite a bit.

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Chapters:
0:00 Intro
1:44 Performance 1988-2004
3:26 Performance since 2005
5:50 A closer look at the formula
9:29 Hypothesis #1
11:21 Hypothesis #2
13:04 Hypothesis #3
18:04 Conclusion

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Before making any financial or investment decisions, I recommend you consult a financial planner or advisor to take into account your personal investment objectives, financial situation, and individual needs.

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investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages.

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