In this post I take a look a popular and quite simple quant strategy that combines value and profitability, the Greenblatt Value Strategy. Results are impressive and the strategy has held up better than most value strategies over the last 10 years. And even more impressive it has even outperformed the index over the last 3 years, which is saying something. Let’s dive right in.
The strategy is from Greenblatt’s book, The Little Book That Beats The Market , first published in 2005. It is also called the Magic Formula and has its own website , where you can generate your own list of qualifying stocks. There was also a follow-up book, the Little Book That Still Beats the Market in 2010. Both books are worth a read. Actually, anything the Greenblatt write is worth a read. If you’re into discretionary investing his You Can Be A Stock Market Genius is a must read. This strategy is a simple but yet very effective value and quality strategy. It invests in the top 10/25 large cap stocks ranked by a combination of earnings yield (value) and return on capital (profitability). It also eliminates sectors where these metrics aren’t very reliable: financial companies, utilities, and real estate operating companies . Here’s a simple description of the strategy as well.
My implementation is almost exactly the same. I limit the universe to large cap stocks, I screen for the top 10 or the top 25 stocks ranked by the Greenblatt earnings yield and profitability factors, and eliminate the same stocks and sectors that he does. Lastly, as usual, I apply the SPY-UI indicator for downside risk management. Results from 2004 through Dec 21, 2019 are published below.
The strategy has performed very well as the table above shows. It has beaten the SPY, the value index, the VC2 strategy which combines value metrics into a composite, and even just a pure trend following approach using SPY-UI. Impressive to say the least.
That’s about it. A simple and effective value and quality strategy from one of greatest value investors.
I’ve just added the strategy to my QuantPulse service last week. Both the 10 and 25 stock implementations are available now.
P.S. I have also gone ahead and added the vol curve quant strategy to the QuantPulse service before year end. it is also available now.