The table below shows the most profitable strategies we found in the 50 page research paper called Quantitative Value Investing in Europe: What Works for Achieving Alpha as well as all our research since then.

Easy to implement

Even though the strategies may look complicated at first dont let that worry you, they are all easy to implement with the screener. And if you struggle remember help is just an email away.

Dont choose the highest returns, rather find the right strategy for you

These are all strategies with very good returns and your goal here is not to choose the highest return strategy.

Your goal is to choose the strategy that matches your investment style. This will also be the strategy you feel most comfortable with and the one that will allow you to sleep comfortably at night.

The Magic Formula investing was developed by Joel Greenblatt and described in his excellent book called The Little Book that Beats the Market .

It is also the book that got me started with quantitative investing.

What the Magic Formula does

The Magic Formula identifies good quality companies that are trading at an attractive price.

It does this by looking for companies with a high earnings yield (companies that are undervalued) and a high return on invested capita l (ROIC) (quality companies).

The formula then ranks the universe of companies on ROIC (where 1 is the company with the highest ROIC), and by earnings yield (where 1 is the company with the highest earnings yield), and then sum the two ranks to give a combined score.

Companies with the lowest combined rank (high quality companies that are undervalued) are recommended for purchase, usually the top 30 companies.

This is how the two Magic Formula ratios are calculated:

Return on invested capital (ROIC) = EBIT / (net working capital + net fixed assets).

Earnings yield = EBIT / Enterprise value.

What returns does the Magic Formula generate?

We tested the Magic Formula as an investment strategy in Europe over the 12 year period from June 1999 to June 2011.

As you can see companies with the lowest Magic Formula values (the most undervalued companies), quintile 1 (Q1) in the above table, did a lot better than companies with a high Magic Formula value, and did this for small, medium and large companies.

Substantially better than the market

Low value Magic Formula companies all substantially outperformed the market which returned 30.54% over the same 12 year period.

You can improve the returns of the Magic Formula strategy

We also tested the Magic Formula strategy with a lot of other ratios and as you can see in the table below the returns of the strategy can be improved substantially.

In the table the returns you should look at are those in column Q1. They show the returns generated by first selecting the best Magic Formula companies (most undervalued) and then sorting them by the items in the Secondary Factor column.

Best combination +783% was Momentum

Please note: This website is not associated with Joel Greenblatt and MagicFormulaInvesting.com in any way. Neither Mr Greenblatt nor MagicFormulaInvesting.com has endorsed this website’s investment advice, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr Greenblatt’s proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website