Five Magic Formula Stocks for the Year Ahead

In his latest article for, Validea CEO John Reese examines his Joel Greenblatt-inspired approach, which has beaten the market by about 10 percentage points per year over the past five-and-a-half years.

“Greenblatt’s two-step approach is simple, but that doesn’t mean it’s easy to use,” Reese writes. “That’s because, like Warren Buffett, Greenblatt realized that in the investing world, simple and easy and two very different things.”

The difficult part of Greenblatt’s approach isn’t the specifics, Reese says — it looks at just two main variables, earnings yield and return on capital. “The hard part about Greenblatt’s approach,” he says, “is the mental aspect. That is, staying disciplined even when times get tough — and they will get tough.”

Investors who stick to the approach can reap big-time rewards, however, Reese says. His Greenblatt-inspired portfolio has returned more than 70%, or 10.4% annualized, since its late 2005 inception. During the same period, the S&P 500 has returned a total of 4.1%. The portfolio limited losses in 2008, and then crushed the market in 2009, something few investors did, Reese says. He also offers a handful of picks the approach is currently high on. To read the full article and see the picks, click here.