Magic Formula
Rank every stock by how cheap it is (earnings yield) and how good the business is (return on capital), combine the two ranks, and mechanically own the best ~20–30 for a year.
The thesis — why it works
Greenblatt compressed Buffett-style investing into two numbers: buy above-average businesses at below-average prices.
- Cheapness → Earnings Yield = EBIT ÷ Enterprise Value. (EBIT and EV, not P/E, so it is neutral to debt and tax.)
- Quality → Return on Capital = EBIT ÷ (Net Working Capital + Net Fixed Assets). High = the business turns capital into profit efficiently.
Rank the entire market on each metric separately, add the two rank numbers, and buy the names with the best combined rank. It is mechanical, unemotional, and diversified. In the book's backtests it beat the market handsomely over the long run — the catch is that it underperforms often enough, and for long enough, that most people quit. That discomfort is the edge.