In his 2005 bestseller The Little Book That Beats The Market, hedge fund manager Joel Greenblatt laid out a stunningly simple way to beat the market using two -- and only two -- fundamental variables. The "Magic Formula," as he called it, produced back-tested returns of 30.8 percent per year from 1988 through 2004, more than doubling the S&P 500's 12.4 percent return during that time. Greenblatt also produced exceptional returns as managing partner at Gotham Capital, a New York City-based hedge fund he founded. The firm averaged a remarkable 40 percent annualized return over more than two decades.
*Note: Our guru strategies are based on our interpretation of the published strategies of the gurus we follow. They are not personally endorsed by the gurus. Full Disclaimer
Since 2005, this portfolio has returned 201.1%, underperforming the market by 66.9% using its optimal tax efficient rebalancing period and 20 stock portfolio size.
Validea used the investment strategy outlined in the book The Little Book That Beats the Market written by Joel Greenblatt to create our Earnings Yield Investor portfolio.
Greenblatt's approach looks only at the return a company generates on its capital, and at the firm's earnings yield (which is similar, but not identical to, the inverse of its price-earnings ratio). The Greenblatt strategy ranks all stocks in both of those categories, and then adds their numerical rankings together. The lower the combined numerical ranking, the better. (Our Greenblatt strategy invests in the 30 stocks with the best combined ranking.) Greenblatt's research shows that while beating the market is hard, it doesn't have to be complicated. The hard part comes not in developing a complex strategy, but instead in finding a proven approach and sticking with it through good times and bad. He stresses discipline as much as any of the gurus we follow.
Performance Disclaimer: Returns presented on Validea.com are model returns and do not represent actual trading. As a result, they do not incorporate any commissions or other trading costs or fees. Model portfolios with inception dates on or after 12/30/2005 include a combination of back tested and live model returns. The back-tested performance results shown are hypothetical and are not the result of real-time management of actual accounts. The back-testing of performance differs from actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. Back-tested returns are presented to provide general information regarding how the underlying strategy behind the portfolio performed in our historical testing. A back-tested strategy has the benefit of hindsight and the results do not reflect the impact that material economic or market factors may have had on advisor's decision-making if actual client assets were being managed using this approach.
The model portfolios offered on Validea are concentrated and as a result they will exhibit high levels of volatility and their performance can be substantially impacted by the performance of individual positions.
Optimal portfolios presented on Validea.com represent the rebalancing period that has led to the best historical performance for each of our equity models. Each optimal portfolio was determined after the fact with performance information that was not available at portfolio inception. As a result, an investor could not have invested in the
optimal portfolio since its inception. Optimal portfolios are presented to allow investors to quickly determine the portfolio size and rebalancing period that has performed best for each of our models in our historical testing.
Both the model portfolio and benchmark returns presented for all equity portfolios on Validea.com are not inclusive of dividends. Returns for our ETF portfolios and trend following system, and the benchmarks they are compared to, are inclusive of dividends. The S&P 500 is presented as a benchmark because it is the most widely followed benchmark of the overall US market and is most often used by investors for return comparison purposes. As with any investment strategy, there is potential for profit as well as the possibility of loss and investors may incur a loss despite a past history of gains. Past performance does not guarantee future results. Results will vary with economic and market conditions.