Joel Greenblatt's Magic Formula: Does It Still Beat the Market?

Joel Greenblatt's Magic Formula has now been tested across two full market cycles since his book was published in 2005. Looking at how the strategy has behaved over roughly 2016–2026 in both UK and US markets, the picture is more nuanced than the original backtest — and arguably more useful. The figures below are illustrative, drawn to show the shape of the results rather than an audited backtest of our own.

What the Magic Formula Actually Is

Greenblatt's formula ranks stocks simultaneously on two metrics: earnings yield (EBIT ÷ enterprise value) and return on capital (EBIT ÷ net working capital + fixed assets). High earnings yield catches cheap stocks. High return on capital catches quality businesses. The formula buys the intersection — cheap quality — and avoids the value traps that pure cheapness screens capture.

Where the Formula Breaks Down

The original backtest period (1988–2004) coincided with value's strong era. The 2016–2022 growth supercycle was brutal for earnings-yield strategies as low-rate conditions massively favoured high-multiple growth stocks. The Magic Formula underperformed the S&P by 3.1% annually during this period. The post-2022 rate environment has partially reversed this — and 2024–2025 has been the strongest 2-year stretch for the formula in a decade.

How DipBuster Incorporates Greenblatt's Principles

The Magic Formula pairs naturally with DipBuster's tools. The Net-Net screener surfaces Graham-cheap balance sheets, the insider feed flags director buying, and the price-action DipBuster Score tells you whether a candidate is dipping or still falling. Combining a cheap, quality business with a stabilising entry point is more robust than relying on any single factor in its bad years.