Earn a back-tested 600.5% more by making just one small change to your Magic Formula investment strategy
If you want to find the best Magic Formula investing companies world-wide in seconds this article shows you how.
It also shows you that if you combine the Magic Formula with just one other ratio, you could increase its returns by up to 600% over 12 years in testing we have done.
How is that possible you may be thinking? Well, read on and you will see how.
What the Magic Formula does
As you know the Magic Formula investment strategy was developed by Joel Greenblatt and described in his excellent book called The Little Book that Still Beats the Market. It is also the book that got me started with quantitative investing in 2006.
The Magic Formula helps you find good quality companies that are trading at an attractive price.
It does this by looking for companies with a high earnings yield (companies that are undervalued) and a high return on invested capital (ROIC) (quality companies).
The formula then ranks the companies on ROIC (where 1 is the company with the highest ROIC), and by earnings yield (where 1 is the company with the highest earnings yield).
To get the Magic Formula rank the ROIC rank and earnings yield rankings are added together. The best company thus has the lowest Magic Formula rank (the lower the better).
Magic Formula investing also works outside the USA!
You know the Magic Formula works in the USA as Joel proved in his book and on his website.
But does it also work outside the USA?
That is what we wanted to know when we tested it in Europe over the 12 year period from June 1999 to June 2011.
This is what we found:
Magic Formula returns in Europe from June 1999 to June 2011 by company size.
Source: Quantitative Value Investing in Europe: What works for achieving alpha
As you can see companies with the best Magic Formula rank, quintile 1 (Q1) in the above table, did a lot better than companies with the worse rank (Q5), and did this for small, medium and large companies.
Magic Formula did substantially better than the market - up to 152.3% better
The best ranked Magic Formula companies all substantially outperformed the market which returned only 30.54% over the same 12 year period.
Click here to get the Magic Formula working in your portfolio now
But, you can improve the returns of the Magic Formula up to 783.3%
We also tested the Magic Formula with a lot of other ratios and as you can see in the table below the returns of the strategy can be substantially improved.
Magic Formula returns when combined with a third ratio in Europe from June 1999 to June 2011.
Source: Quantitative Value Investing in Europe: What works for achieving alpha
Look at the returns in column Q1, it shows the returns generated by first selecting the 20% best Magic Formula investing companies and then selecting only those companies that were best rated with the ratios in the column called Factor 2.
Best combination +783% was Momentum (600.5% improvement)
This means you could have earned the highest return of 783.3% over the 12 year period if you invested in the best ranked Magic Formula companies that also had the highest Price Index 6 month (share price momentum).
This is a 600.5% improvement over the best return of 182.8% if you used only the Magic Formula to get investment ideas.
Here is an example of a Magic Formula investment strategy that includes momentum:
I want to use the Magic Formula now sign me up!
How to find Magic Formula investment ideas outside the USA
But how can you find Magic Formula investment ideas outside the USA as Joel Greenblatt’s website only gives you US investment ideas?
The Quant Investing screener does all this for you with a few mouse clicks.
You simply select the countries you want to invest in and the screener does the rest for you.
It is this easy to load the Magic Formula screen we have already saved for you:
Click image to enlarge
How to load the Magic Formula investment screen
Even more help
Not only does the screener give you Magic Formula ideas world-wide it also allows you to combine it with more than 110 other ratios and indicators available in the screener.
For example:
- Piotroski F-Score
- Free cash Flow yield
- Debt to Equity
- Gross Margin - Novy-Marx (the best quality ratio we have tested)
- Stock price momentum
- and many more
Remember the table above that showed you the results of combining the Magic formula with a second ratio? With the screener you can do that in a few seconds with a few mouse clicks.
Screener is really easy to use
Also the screener is really easy to set up and use.
You can save all your searches (as many as you like) which mean you can repeat them as often as you like with a few mouse clicks.
You won’t find an easier to use stock screening tool anywhere!
I want to get started right now - Click here to sign up
All this costs less than a lunch for two
How much can a tool like this cost, you may be thinking?
To make it affordable, and give you a great return on your investment, even if your portfolio is still small we have made the price of the screener surprisingly low.
It costs less than an inexpensive lunch for two each month (Click here for more information).
Don’t hesitate, you have nothing to lose. If you are not 100% satisfied you get your money back – guaranteed!
PS: Why not sign up now, while this is fresh in your mind?
PPS To find Magic Formula investment ideas in the countries you invest in (for less than an inexpensive lunch for two) click here: Join today
These Magic Formula articles may also interest you:
Magic Formula investment strategy back test
Does the Magic Formula also work in Finland?
Does the Magic Formula also work in Belgium, Luxembourg and the Netherlands?
A better alternative to the Magic Formula?
Investment strategy tested: Magic Formula investing & 6 month Price Index
How to get the best returns with Magic Formula investing
Please note: This website is not associated with Joel Greenblatt and MagicFormulaInvesting.com in any way. Neither Mr Greenblatt nor MagicFormulaInvesting.com has endorsed this website's investment advice, strategy, or products. Investments recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website
