Joel Greenblatt is the founder of Gotham Capital, a hedge fund with extremely good returns. We like Greenblatt because he’s smart and not so secretive about his investment style. He’s authored two books, You Can Be A Stock Market Genius and The Little Book That Beats the Market.
In the The Little Book, Greenblatt describes a quantitative strategy – which he calls the "magic formula" -- to pick stocks. It’s actually a very simple quantitative stock ranking scheme. It uses return on capital and earnings yield as inputs. Return on capital is the metric that shows whether a business is a good one or not. Earnings yield is the metric that shows whether a company is cheap or not. Greenblatt suggests using these measures to identify good but cheap businesses, and buy them.
Recently Greenblatt started implementing his “enhanced” magic formula, which was updated after rigorous quantitative research. Luckily for ordinary investors we have a delayed access to Greenblatt’s 13F portfolio which have stocks that are picked by the enhanced magic formula. Here are the top 50 stocks in Greenblatt’s 13F portfolio: