Most investors are familiar with Joel Greenblatt’s Magic Formula, made famous in his book, “The Little Book That Beats the Market”.
The key drivers of the Magic Formula we know today are Earnings Yield (EBIT / Enterprise Value) and Return on Capital (EBIT / (Net Fixed Assets + Working Capital)). Companies are ranked according to these two metrics — highest earnings yield and highest return on capital — then the 20 to 30 companies with the highest ranks are purchased at a rate of two to three positions per month over a 12-month period.
However, before Greenblatt came up with this quality-and-value screen, he built a strategy around Benjamin Graham’s net-nets strategy, which relatively unheard of and has since become...
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