Joel Greenblatt Portfolio: Using His Magic Formula to Pick Winning Stocks

Leading Gotham Management to impressive returns since its inception in 1985 is just one way to encompass Joel Greenblatt’s career. Also, he contributed to the investment world by implementing the so-called “Magic formula” for helping in identifying undervalued assets. Joel Greenblatt’s Portfolio is currently valued at $5.55 billion, and its value has constantly risen for the last three years.

Greenblatt emphasizes diversification in his investment strategy, which is why his portfolio has 1,305 holdings. Not only that, but the biggest holdings are SSgA Active Trust, Tidal ETF trust, and iShares Core S&P 500 ETF, which provides further diversification among the top 500 traded companies. Besides these trusts and ETFs, other major holdings include Apple, Microsoft, and Alphabet Inc Class A (NASDAQ:GOOGL).

His accomplishments do not stop with investing. Greenblatt is a professor at Columbia University Graduate School of Business, where he shares his knowledge, experience, and insights to new generations of potential investors. He also wrote several influential books focused on investments including “The Little Book That Still Beats the Market” and “You Can Be A Stock Market Genius”.

Types of Stocks in Joel Greenblatt’s Portfolio

Joel Greenblatt’s portfolio is highly diversified and there are two distinct types of holdings in it. There are several ETFs and trusts that Greenblatt holds for diversification purposes and their overall good and constant returns. The other group is publicly traded companies, with a slight focus on the tech sector.

ETF and Trust Holdings

• SSgA Active Trust – SPDR S&P 500 ETF Trust (NYSE:SPY) with 8.9% of the portfolio

Greenblatt has several times started from scratch when creating this holding. The last time, in 2020 he decided to seriously pile up stocks. Currently, he owns 992 thousand stocks valued at $495 million. What is good about this fund is that it offers a wide diversification rate with trading all the major publicly traded companies in the United States. This fund is highly liquid and is managed by State Street Global Advisors, one of the best asset managers in the world. Greenblat invested a total of $421 million resulting in an 18% gain.

• Tidal ETF Trust Gotham Enhanced 500 ETF (NYSE:SFY) with 6.1% of the portfolio

This is a trust fund managed by Joel Greenblatt as a part of the Gotham firm. The total value of this fund is $338 million, and the biggest holdings in it are Microsoft, Meta, Alphabet, and Amazon. This ETF aims to find long-term capital appreciation by investing in long positions from the S&P 500 index. This holding brought back returns of 13% so far.

• iShares Core S&P 500 ETF (NYSE:IVV) with 1.7% of the portfolio

Greenblatt started investing in this BlackRock-managed fund in Q2 2022. Since then he has been increasing his share and currently owns 184 thousand shares. They are valued at $92.1 million, while he invested in it $74.4 million. This investment brought him gains of 24%. Through this fund, he is also exposed to all the most popular companies in the United States.

• Tidal ETF Trust – Gotham 1000 Value ETF (NASDAQ:GLVU) with 0.91% of the portfolio

This Greenblat-managed fund consists of 400 to 600 securities taken from the biggest 1,400 securities traded in the United States. The main parameter was the largest discount that the stock price could come with.

Publicly Traded Companies

• Snowflake Inc Class A (NASDAQ:SNOW) with 1.62% of the portfolio

Greenblatt started trading Snowflake stocks in Q2 2021, but the first major acquisition he made was in Q3 2022 when he bought 424 thousand shares at $165. Since then he only sold 21 thousand shares in Q4 2022. The price of shares fell from $392 in Q4 2022 to an average of $160 during 2023. The price began to rise in 2024 coming to a current $230. Greenblat invested $64.7 million in this holding, while it is now valued at $90 million netting a gain of 39%.

• Apple Inc (NASDAQ:AAPL) with 1.42% of the portfolio

Apple is one of the favorite Greenblatt stocks. He has been trading them for 15 years and it has proven to be very lucrative. Currently, he owns 431 thousand stocks valued at $78.6 million. His total investment in this holding is $15.8 million resulting in a gain of 396%. During 2023 he increased this position by approximately 70 thousand shares.

• Microsoft (NASDAQ:MSFT) with 1.38% of the portfolio

Microsoft is one of those tech stocks that Greenblatt likes to trade. He has been doing it for 15 years with high success. During that time he invested $20.2 million and his current 190 thousand stocks are valued at $76.6 million. This lucrative deal has brought him a gain of 278%.

Sector Allocation in Joel Greenblatt’s Portfolio

Joel Greenblatt keeps a highly diversified portfolio through investing in companies from different sectors, and also focusing on investing in funds that have a wide investment reach.

1. Technology with 24.1% of the portfolio valued at $1.34 billion
2. Other investments, mostly ETFs and Trusts with 22.5% of the portfolio valued at $1.25 billion
3. Industrials with 11.4% of the portfolio valued at $634 million
4. Consumer Discretionary 10.4% of the portfolio valued at $577 million
5. Finance with 8.3% of the portfolio valued at $459 million
6. Healthcare with 6.7% of the portfolio valued at $373 million
7. Consumer Staples with 5.9% of the portfolio valued at $330 million
8. Energy with 3.7% of the portfolio valued at $206 million
9. Materials with 2.8% of the portfolio valued at $158 million
10. Utilities with 2.2% of the portfolio valued at $122 million
11. Telecommunication with 1.2% of the portfolio valued at $67.8 million
12. Real Estate with 0.6% of the portfolio valued at $35.8 million.

Understanding Joel Greenblatt’s Strategy & Investment Philosophy

Concept of Magic Formula Investing

With the use of the “Magic formula,” the investor can identify potentially undervalued stocks based on two parameters – Return on capital employed (ROCE) and earning yield.

With calculating ROCE it is possible to measure how efficiently the company uses its capital to generate profits. If a company has a high ROCE rating that means that it is capable of converting its investments into earnings.

The earning yield represents the inverse of the price-to-earnings ratio. It shows the company’s earnings per share divided by the stock price.

To successfully use the formula the process requires three phases. The first is to find appropriate companies with high ROCE and high earning yields. To do so one can use help from financial data providers.

Once you gather a group of relevant companies, you should rank them by both metrics. Greenblatt doesn’t favor one over the other and recommends directly comparing both metrics.

Once you rank the companies, invest in those best ranked. How much of the companies you will invest in depends on your goals, preferences, and investment strategy.

Take A Look At Joel Greenblatt’s Investment Strategy: Simple Yet Powerful:

Key Principles of Joel Greenblatt’s Strategy

The cornerstone of Greenblatt’s strategy is rooted in value investing. He is always searching for companies that are traded below their intrinsic value. He even developed a tool, the mentioned Magic formula to increase chances to find the right companies to invest in.

He believes that companies with strong fundamentals, good management, and unique advantages can generate returns in the long run. Greenbalt often chooses companies that are overlooked by the rest of the market, and at the same time shows metrics that can produce good performance.

Greenblatt’s thought is that markets can be inefficient and that in those moments, essentially good companies can be bought for a cheap price. To rank these companies he uses a formulaic approach that cannot be subjective and always shows the actual state of companies.

He also doesn’t prefer conducting frequent trades and aims to keep business for a long time. He is one of those investors who stay calm during even the worst periods and believe that the chosen companies are good and that they will beat the current bad streak.

Analyzing Joel Greenblatt’s Portfolio Performance

Historical Performance of Joel Greenblatt’s Portfolio

While in the command of his old hedge fund Gotham Capital, which Greenblatt founded in 1985 he managed to deliver annualized returns of 50%. And that was not an anomaly, because it lasted between 1985 and 1994.

In 2008 he founded a new fund Gotham Asset Management. However, due to the popularization of this approach, its competitive edge was almost nullified. A backtest was conducted to analyze the market performance between 2003 and 2015. With the use of the formula, the annual returns were 11.4% while in the same period S&P 500 delivered 11.4%. The formula outperformed the index, but not as much as expected.

This gap continued to shrink resulting in lower returns for the Greenblatt portfolio. In the last 5 years, Greenblatt’s main fund Gotham Large Value Fund Institutional Class (MUTF:GVALX) delivered only 9.15% when compared to 12.3% returns of the S&P 500 index.

When we look at the compounded returns dating back to 2006 Gotham Asset Management delivered 214.9%. In the same period, the S&P 500 outperformed it with 345.3% returns.

Evaluation of Success Factors in Joel Greenblatt’s Portfolio

Greenblatt’s portfolio showed the most promise during the 80s and 90s while not so many investors picked up his strategy. With passing time the returns were getting modest, and he didn’t adapt his strategy enough to combat that trend. Now, the S&P 500 index beats his fund, which was unthinkable 15 years ago.

Risks and Challenges

The biggest issue with Greenblatt’s Magic formula is its focus on undervalued stocks. These can underperform when compared to growth stocks when the market conditions are better suited for growth stocks.

Since the implementation of the formula, investing in value stocks has become very popular. That can factor into the price of the stocks and lead to overvaluation of the value stocks. If the prices go high because of the high demand, you may end up buying stocks that are not undervalued.

Practicing value investing even with the use of the Magic formula is a test of character. The markets are shifty and stocks can lose a lot of value in the short term. Only a patient and composed investor can handle these twists and keep his wits about it. If you cannot control your emotions, then you will not perform so well as a value investor.

Challenges in Implementing Joel Greenblatt’s Strategy

This strategy is based on small-cap stocks, and it can be difficult and time-consuming to find accurate and current data for those companies. Even when you find data, it can be in different formats, which demands standardization for the data to make sense.

Another common issue with small-cap stocks is that brokers often do not allow fractional share purchases which can be a challenge when implementing the formula. Do not forget liquidity concerns. Most small-cap companies have issues with liquidity which results in difficulty in buying or selling their stocks.

Common Mistakes to Avoid in Implementing Joel Greenblatt’s Strategy

Real-life Examples of Success Using Joel Greenblatt’s Strategy

Some of the older and newer examples of success using the Magic formula are:

• Amazon.com Inc (NASDAQ:AMZN). There are reports that the Magic formula was used to assess Amazon stocks in the early 2000s showing great potential in the long term
• Facebook (FB). The formula was used on Facebook before it became a giant. It also showed glimpses of its potential, which proved to be right
• Church & Dwight Co., Inc. (NYSE:CHD). These stocks are shown in some Magic formula screens where they hold high ROCE with a strong dividend history
• Lowe’s Companies Inc (NYSE:LOW). Some iterations of the formula show good values on both parameters. This is despite its recent market fluctuations.

Tips for Implementing Joel Greenblatt’s Strategy

The first thing to do is to follow data and methodology. Do not forget the focus on quality provided by ROCE and earning yield metrics. Besides those data pay attention to other fundamental values like the quality of management, sustainable economic moats, and competitive advantages.

When searching for data for the metrics, be sure that you are using current data. Outdated information won’t do you any good. Also, know what sources you are using, and how relevant and trustworthy they are.

Although the formula is a definitive example of the technique to use, do not use it rigidly. Also, pay attention to market conditions, assess your risk management, and check for compatibility with your investment goals.

When using the Magic formula it is advised to exclude foreign stocks from the analysis.

Practical Advice for Investors Following Joel Greenblatt’s Approach

If you decide to follow Joel Greenblatt’s approach you should stick to some advice that you can take from his investment approach.

One of the common mistakes is over-trading. If you decide to frequently change positions, and include new portfolio holdings, it can raise the transaction costs. This is especially the case with small-cap stocks. Your goal is to find and capture the best opportunities, with minimal transaction costs.

From Greenblatt’s portfolio, we can see that he is all about diversification. The formula also encourages it. But, to be sure, do not be afraid to further diversify your portfolio. This way you will lower the risk chance.

What we can also see from Greenblatt’s work is that he often invests in highly liquid assets. Do not let yourself be trapped with large investment chunks in illiquid companies. You need liquid assets so you do not limit yourself during high volatility periods.

One common mistake when using the Magic formula is overestimating your expertise. Using this method with success like Joel Greenblatt is not easy. He is a master and a veteran in this industry. Before you decide to use his approach, evaluate your knowledge and experience, and do not be afraid to consult professional guidance.

FAQs

What Is the Magic Formula of Joel Greenblatt?

The Magic Formula of Joel Greenblatt is a strategy employed by value-oriented investors. With it, investors identify undervalued companies that have a potential for long-term growth. This formula is based on two metrics:

• Return on capital employed (ROCE). This metric measures the level of effectiveness of a company when it comes to using capital to generate returns. A higher ROCE score points to a company that is highly efficient in generating returns with its capital
• Earning yield. This is a metric that is reversed to the price-to-earnings ratio. It shows the company’s earnings per share divided by its stock price. A higher earning yield result shows a company with stocks that are cheap when compared to its profitability.

Although Greenblatt recommends that these two metrics are kept in balance, if the case demands it, one metric could mean more than the other. In practice, this means if the company’s earning yield is exceptionally high, ROCE doesn’t need to achieve those ratings, and vice versa.

Does Greenblatt’s Magic Formula Work?

The best way to determine the success of Greenblatt’s Magic formula is to analyze his fund’s performance. In the first two decades between 1985 and 2004, his fund performed exceptionally well. It often achieved annual returns in the range of 40%, easily beating the S&P 500 index.

But, after 2006 the results were mixed. The fund still delivered usually double-digit returns, but there were cases when the S&P 500 delivered higher returns than the fund. One of the reasons for this is commercialization of this approach. Once the value investors started using it, the formula lost its edge and could deliver like before when it was considered an exclusive tool.

Final Thoughts

Successfully leading Gotham Asset Management for three decades, defining a tool invaluable for value investors, and writing several highly influential investment books – that could sum up Joel Greenblatt and his investment career.

A highly influential value investor that moved the boundaries of the business becoming a role model for a new generation of investors. His fund constantly overperformed the comparable indexes for decades.

If we look at the last decade, the fund did slow down, but it still shows good results. In 2023 Greenblatt did a solid rehaul of the fund’s portfolio, and some underdogs like Masimo Corp (NASDAQ:MASI), and Leidos Holdings Inc (NYSE:LDOS) can show exceptional results in the long run.

Related Content

• Tom Russo Portfolio Performance Analysis & Current Holdings
• Chris Hohn Portfolio: Strategies to Model for Your Own Portfolio
• Howard Marks Portfolio: Analyzing His Risk Management Strategies
• Charlie Munger Portfolio Performance: Analyzing the Strategies His Success
• George Soros Portfolio: The Billionaire’s Blueprint for Financial Triumph
• Jeremy Grantham Portfolio Analysis: A Look at The Guru’s Top Holdings