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. We re-ran the original backtests using updated data covering 2016–2026 for both UK and US markets. The results are more nuanced than the original — and arguably more useful.

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 DipBuster Score incorporates both dimensions of the Magic Formula — earnings quality and relative cheapness — alongside Graham's NCAV screen and insider signals. The result is a composite that captures the best elements of each methodology while reducing the drawdowns that come from any single factor's bad years.