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RWH003: How To Win The Investing Game w/ Joel Greenblatt
We Study Billionaires - The Investor’s Podcast Network
Is the Magic Formula Still Effective?
There is widespread curiosity about whether the 'magic formula' remains a valid investment strategy, particularly in light of alternative approaches such as Tobias Carlyle's, which emphasizes focusing solely on low-priced stocks while disregarding quality metrics like return on invested capital. The original algorithm, built on simple metrics for value and quality, demonstrated substantial success in early tests, leading to its popularization. Empirical evidence suggests that while investing based solely on cheapness shows higher volatility, both cheap and quality stocks yield beneficial results. The performance of portfolios that prioritize value, especially those targeting deep value investments, has been impressive, nearly matching the overall market returns. Current valuations indicate that mainstream indexes like the S&P 500 may experience limited growth, around single-digit returns, in the near term. In contrast, a disciplined value approach suggests much higher potential returns of 35% to 40% over a similar timeline, indicating a promising outlook for deep value strategies. This reinforces the continued relevance of the magic formula and highlights an opportunity for outperformance relative to conventional market indices.
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