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Magic Formula Investing Companies Vs. The Most Traded Companies In The U.S. Markets

Asgeir Strandlie profile picture
Asgeir Strandlie


  • Explanation of what the Greenblatt Magic Formula is all about, and how the system works. The historical background is also explained.
  • A study of how strong the Magic Formula companies are in a financial matter, compared to the 30 most traded companies in the U.S. Markets.
  • A study of the market performance of the Magic Formula companies in relation to the S&P 500 Index, during the last three years.
  • Easy-to-read diagrams where every company in the study is included.
  • You can have your own stocks getting ranked and compared to the most traded stocks and to the Magic Formula stocks.

Are you among all those people who wonder how strong the Magic Formula Companies actually are? What their financial status are compared to the most traded companies in the U.S. Markets for example? And not at least how they perform in the market compared to the most traded companies? A while ago I started to wonder about this myself, so I decided to figure it out.

First: Let's have a quick look at what the "Magic Formula" really is all about

The Magic Formula Investing idea was first introduced by Joel Greenblatt in his best-selling book “The little book that (still) beats the Market”. The basic approach and the main foundation are built on the philosophy developed by "The Father of Value Investing", Benjamin Graham (1894-1976), the person that Warren Buffet declares as his mentor. Benjamin Graham describes his market philosophy and his investment ideas in his book "The Intelligent Investor", which is defined as a "must read" for value investors around the world.

The phrase "The Magic Formula" is probably chosen to emphasize exactly the opposite: There is nothing magic about the method! Nothing magic at all. In his book (and in interviews), Joel Greenblatt states several times that the formula is so simple, logic and straight-forward that it might be difficult to take it seriously. And even more difficult to follow it as an investment strategy and put your own money into it. Is it really likely that such a simple approach is able to beat the market?

The main purpose with "The Magic Formula" is that it picks above average companies at below average prices. In other words, the system is built to discover high quality companies at bargain prices. Every company noted at the U.S. Stock Exchanges are included in the system, except from banks and utility companies

This article was written by

Asgeir Strandlie profile picture
Hi everybody, I am Asgeir, 46 years old and living in Norway. My education is a bachelor in economics. I have been a big fan of value investing for several years now. It all started when I first read the book of Joel Greenblatt “The Little Book that (still) beats the Market”. Before that I used different well known models and technical analysis in my stock and trading research for many years. Using those models brought me both gains and losses, with more or less success. I went on and off with trading both shares and stock options, but over time I realized that the transaction costs of trading simply ate more and more of my trading capital. Sounds familiar? Over the years, I have learned this one most important thing when it comes to investments and trading in the stock market: Keep it simple, and stick to it! But what the heck does that mean..?! What simple thing should you stick to? Well, that is the reason I have established Stock Bargains. It is a privilege for me to provide you with valuable material and content, so that you in an easy way will be able to know “how and when to invest in what”. And not at least, explaining why you should do exactly that. I will provide you with useful tools to spot the top undervalued stocks in the US markets. And even get your favourite stocks ranked as well. In this way you become a true value investor. Which also means, most likely, that you will be a highly successful investor! Anyways, I wish you all the best of luck in your value investing future! Asgeir S.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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