Joel Greenblatt On The Origins of the Magic Formula

Joel Greenblatt started with value investing in the end of the seventy years, he wrote an article in Forbes about Benjamin Graham. The article was about what he considered some kind of magic formula, what he caught his eyes. It was like a formula, if you just buy stocks that meets some particular specifics, you can make a lot of money. He was a college student then, and a formula of making money was very interesting for him. He was concerned then to see what is that all about.

He got couple of his co-workers at MBA school, and that was something pretty new for them. Forgetting about the details, it was very hard at that time to get databases from companies to get them. They found some statistics, and they actually been enough for his work. Joel Greenblatt and his teammates went month by month through five thousand companies, and they got all the data that they collected over months of writing down prices and balance sheets items and everything else for these companies and they run a test that figure it out that stocks of those companies are below liquidation value.

Basically, with the formula they tried to find if they could buy good companies for a cheap price. So, they defined what means a good company: companies that could earn a high return on capital. That test was very fascinating for him and the results were phenomenal. Joel Greenblatt was always interested in not working that hard, and so if there was a magic formula that really could make him not work too hard and also make a lot of money, he thought that it was a great thing.

Joel Greenblatt quotes from this video:

  • If you can buy something for a lot less than you think it's worth that makes a lot of sense, and I went into the business doing that
  • Studies over years showed that value does work over the time
Submitted by YouTube Trader on Tue, 04/06/2010 - 18:56

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