Greenblatt reduced investing to two questions: is it a good business, and is it cheap? Rank every company on both, buy the top of the list, and repeat. His Magic Formula is deliberately, almost provocatively simple, and it is the backbone of SageRanks's Greenblatt mode.
In The Little Book That Beats the Market, Greenblatt set out a method a patient investor could follow with no forecasting at all. It scores every company on two factors:
Rank the market on each factor, add the two ranks together, and buy the companies that score best on the combination. Hold them for a year, then rebalance into the new top of the list. There is no story, no target price and no judgment call. The formula does the choosing.
Greenblatt's back-testing showed the method beating the market handsomely over long stretches. But the real point of the book is psychological. The formula only works for those who stick with it through the years when it lags, and most people cannot.
"Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot."
By stripping out human judgment, the Magic Formula removes the emotion that wrecks most investors. Its hardest part is not the arithmetic. It is the patience to keep following it when it is out of fashion.
The formula is a powerful, systematic value tilt: good businesses at cheap prices, chosen without bias. Its weaknesses are the weaknesses of any purely mechanical screen. It relies on operating earnings and enterprise value, which are not always clean; it can be fooled by cyclicals showing peak earnings, which look cheap right before profits fall; and in its original form it leans toward smaller companies. Greenblatt himself stressed that it works on average across a basket, not on every single name.
Here we owe you a caveat. Greenblatt's real formula uses operating earnings over enterprise value and return on capital, and our per-company dataset carries neither enterprise value nor operating earnings. So the ranking approximates his two pillars with return on equity for quality and price-to-book for cheapness, weighted equally. The screen's hard limit uses a genuine earnings yield, earnings divided by price, floored where it stops beating a government bond. It is an honest proxy for the Magic Formula's spirit, not the literal formula, and we would rather say so than pretend. The full weighting is on the methodology page.
See which companies pass Greenblatt's screen today →