Analysis of the Value Investing Strategy "Magic Formula"

This paper studies Joel Greenblatt’s “Magic Formula” for stock selection. Selection criteria were described in his book “The Little Book That Still Beats the Market”. Greenblatt (2010) provides results from his value investing strategy that consistently outperformed the S&P500 index from 1988 to 2009. In this paper his investment approach was implemented for Russian publicly traded companies and the strategy’s returns were compared to the benchmark’s returns. IMOEX index was chosen as the Russian stock market benchmark. The CAPM Jensen’s alpha as well as Sharpe ratio were used to measure risk-adjusted return and test if the strategy provides any abnormal returns. Similar to Greenblatt’s Magic Formula, this study employed the two magic formula’s factors to select stocks: return on capital (ROC) and earning yield (EY). It has been shown that the “Magic Formula” is able to produce a higher risk-adjusted return than the Russian market index from April 2009 to March 2018. The main 30-stock portfolio generates 24,75% of the annualized return, comparing with 14,49%, that of the benchmark during the tested period.