Prompt d'Analyse d'Investissement de Joel Greenblatt

❌ **Misconception 1**: "The Magic Formula beats the market every year"
- **Reality**: The formula underperforms in about 17% of years and may underperform for **2-3 consecutive years**. Greenblatt emphasizes that short-term underperformance causing people to quit is precisely what allows long-term excess returns to persist. If it worked every year, everyone would use it, and the edge would disappear.

❌ **Misconception 2**: "Just buy whatever the formula recommends"
- **Reality**: The formula cannot identify **accounting fraud, one-time earnings, industry decline** and other risks. Greenblatt himself recommends basic qualitative screening rather than purely mechanical execution.

❌ **Misconception 3**: "Greenblatt himself only invests using the Magic Formula"
- **Reality**: At Gotham Capital, he primarily did **special situation investing** (spin-offs, merger arbitrage, bankruptcy restructuring), achieving returns far higher than the Magic Formula. The formula was specifically designed as a simplified version for **ordinary people without professional expertise**.

❌ **Misconception 4**: "Using P/E and ROE instead achieves the same effect"
- **Reality**: Greenblatt deliberately uses **EBIT/EV** instead of P/E because it eliminates the effects of different tax rates and capital structures. He uses **ROIC** instead of ROE because ROE can be artificially inflated by high leverage. The choice of metrics is itself the formula's core competitive advantage.

✅ **This is arguably one of the most suitable quantitative strategies for ordinary investors**:

**Advantages**:
- ✅ **Simple to operate**: No complex financial analysis skills needed; just buy according to formula rankings
- ✅ **Strong discipline**: Mechanical operation avoids emotional interference
- ✅ **Free tools**: Greenblatt created magicformulainvesting.com, providing free screening results
- ✅ **Long-term effective**: Multiple independent studies confirm the strategy outperforms the market across different markets and time periods

**Issues to note**:
- ⚠️ **Unstable short-term performance**: May underperform in any single year. Greenblatt's own data shows the formula underperforms in about **17% of years**
- ⚠️ **Execution difficulty**: When the formula underperforms for 6-12 consecutive months, most people give up (precisely when they shouldn't)
- ⚠️ **Transaction costs**: Annual rotation involves frequent trading; consider commission and tax impacts
- ⚠️ **Market applicability**: Original formula designed for US stocks; needs parameter adjustment for other markets

**Practical advice**:
1. Use the Magic Formula as a **starting point for stock selection**, not the sole basis
2. Combine with simple qualitative judgment (exclude suspected fraud, one-time earnings inflation)
3. Commit for at least **3-5 years** to see the strategy's true effectiveness

**Core Comparison**:

| Dimension | Greenblatt | Buffett |
|-----------|-----------|--------|
| **Stock selection** | Quantitative formula auto-screening | Qualitative + quantitative deep research |
| **Holding period** | Strict annual rotation | Long-term/permanent |
| **Portfolio size** | 20-30 stocks (diversified) | Concentrated in few companies |
| **Human judgment** | Minimizes human intervention | Highly dependent on personal judgment |
| **Core metrics** | ROIC + Earnings Yield | Free cash flow + Moats |
| **Target audience** | Designed for ordinary investors | Requires deep business analysis skills |

**Essential similarity**: Their core philosophy is identical — **buy excellent businesses at reasonable prices**. Greenblatt says his Magic Formula essentially quantifies Buffett's approach.

**Key difference**: Buffett emphasizes **qualitative factors** (management, brand, culture) that quantitative formulas cannot capture. Greenblatt acknowledges the formula misses these but believes **systematic execution** suits ordinary people better than subjective judgment.

Joel Greenblatt's method is best suited when market conditions align with Magic Formula, value investing, quantitative screening characteristics. Investors should decide whether to adopt this strategy based on their risk tolerance and investment objectives.

The Magic Formula is a quantitative stock selection method proposed by Greenblatt in "The Little Book That Beats the Market," using **two simple metrics** to find stocks that are "both good and cheap."

**Two Factors**:
1. **Return on Invested Capital (ROIC)** = EBIT / (Net Working Capital + Net Fixed Assets). Measures business quality — how efficiently it generates profits
2. **Earnings Yield** = EBIT / Enterprise Value (EV). Measures valuation — how cheap the stock price is

**Operating Steps**:
1. Rank all stocks by ROIC (highest = #1)
2. Rank all stocks by Earnings Yield (highest = #1)
3. Add both rankings; lowest combined rank = best candidates
4. Buy the top 20-30 stocks, rotate annually

**Historical backtest**: From 1988-2004, the Magic Formula achieved approximately **30.8% annualized returns**, far exceeding the S&P 500's 12.4%.

**Greenblatt's other achievements**: His Gotham Capital achieved approximately **40% annualized returns** from 1985-2005, and he is also a professor at Columbia Business School.

**Joel Greenblatt**'s Gotham Capital achieved over 40% annual returns for 20 years. He proposed the **"Magic Formula"**: focus on two metrics - Earnings Yield (EBIT/Enterprise Value, inverse of PE) and Return on Capital (EBIT/Tangible Capital, measuring profitability). The Magic Formula screens for companies that are "cheap and excellent": undervalued but highly profitable. Greenblatt proved with historical data: from 1988-2004, the Magic Formula returned 30.8% annually vs S&P 500's 12.4%. This is a quantified version of value investing, combining Graham's "cheap" with Buffett's "excellent". Greenblatt proved that simple quantitative rules, consistently executed long-term, can beat the market.

Core logic applies, but needs adjustment:

✅ **Evidence of effectiveness**:
- Logic of buying good companies at good prices works globally
- Multiple academic studies validate ROIC and earnings yield factors
- Performs well in backtests across multiple countries

⚠️ **Adjustments needed**:
- Accounting standard differences affect ROIC calculation
- Lower information transparency in emerging markets
- Need to exclude more outliers (shell companies, manipulated data)
- A-shares need additional screening for ST stocks and delisting risks

💡 **Advice**: Principle works, but screening criteria need adjustment for local market characteristics

Greenblatt's Magic Formula is based on two simple metrics:

**Two key metrics**:
1. **Return on Capital (ROIC)**: Measures business efficiency, higher is better
2. **Earnings Yield**: Measures valuation cheapness, higher is cheaper

**Method**:
- Rank all stocks by ROIC
- Rank all stocks by earnings yield
- Add both rankings, top-ranked = good companies at good prices
- Buy top 20-30 stocks, rotate after one year

Essence: Buy good companies at cheap prices

Greenblatt was famous for special situations investing early in career:

**Common types**:
1. **Spin-offs**: When large companies spin off subsidiaries, subsidiaries often undervalued
2. **Merger arbitrage**: Spread trading after acquisition announcements
3. **Bankruptcy reorganization**: Value reassessment after restructuring
4. **Management changes**: New management unlocks value

**Why it works**:
- Institutional investors forced to sell due to size constraints
- Market underreacts to complex events
- Information asymmetry creates opportunities
- Requires deep research, most investors won't spend time