Risk: High

The Magic Formula

"Buying good companies at cheap prices makes sense." — Joel Greenblatt.
A systematic, emotion-free approach to value investing that has historically beaten the market.

Quantitative Value Strategy

The Magic Formula

Based on Joel Greenblatt's proven algorithm. Systematically buy Good Companies (High Quality) at Cheap Prices (High Yield).

Parameter Config

₹

₹10.00 L

+5%

Historically, this strategy generated +10% to +15% alpha over indices, but past performance is arguably harder to replicate now.

The Algorithm

  1. 1
    Rank by Quality (ROCE)

    High Return on Capital = Good Business.

  2. 2
    Rank by Price (Yield)

    High Earnings Yield = Cheap Price.

  3. 3
    Combine & Select Top 30

    Add ranks together. Buy the best combined scores.

  4. 4
    Repeat Yearly

    Rebalance strictly every year. Ignore noise.

The Strategy Visualized

Quality (ROCE)
Cheapness (Earnings Yield)
Great CompanyExpensive Price
The Magic ZoneGreat Company + Cheap Price
WE BUY HERE
Junk CompanyExpensive Price
Junk CompanyCheap Price (Value Trap)

15-Year Wealth Projection

Projecting 17% CAGR (Magic) vs 12% CAGR (Nifty).

Reality Check: The strategy can underperform for 2-3 years in a row. Following it blindly needs discipline.

The "Little Book" Summary

This strategy comes from the bestseller The Little Book That Beats the Market. Greenblatt argues that most investors fail because they let emotions rule.

By ranking companies strictly on two metrics (Quality and Price) and blindly buying the top list, you systematically exploit market inefficiencies.

Why it's Hard

If it's so magic, why doesn't everyone do it?

Because it often buys companies that are "hated" by the market (unpopular, facing temporary issues). holding them requires "stomach".

Also, it can underperform the index for years. Most people quit just before the strategy outperforms.