How Joel Greenblatt’s magic formula can help your investing

Professional investor Joel Greenblatt developed a simple but powerful formula to generate market-beating returns. Phil Oakley explains what it is and how to use it.

Joel Greenblatt is worth listening to. After setting up Gotham Capital in 1985, his fund returned 40% a year for the next 20 years. And unlike some investors, Greenblatt who is also a professor at Columbia Business School -is very generous with his views on how to invest successfully.

He is the author of two excellent books - You Can Be a Stock Market Genius and The Little Book That Beats The Market. The books are jargon free, easy to read, and full of good advice for the private investor.

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Sales10001000
Operating Profit (A)100100
Interest @ 5%0-12.5
Profit before tax10087.5
Tax @ 30%-30-26.25
Net Profit (B)7061.3
Row 6 - Cell 0 Row 6 - Cell 1 Row 6 - Cell 2
Equity (D)500250
Debt (E)0250
Capital Employed (F)500500
ROE (B/D)14%25%
ROCE (A/F)20%20%
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Sales10001000
Operating Profit (A)100100
Interest @ 5%0-12.5
Profit before tax10087.5
Tax @ 30%-30-26.25
Net Profit (B)7061.3
Shares in Issue500250
Earnings per share (p)1424.5
Row 8 - Cell 0 Row 8 - Cell 1 Row 8 - Cell 2
Equity (D)500250
Debt (E)0250
Share price (p)100100
Market Value of Equity (G)500250
Enterprise Value (G+E) = H500500
Row 14 - Cell 0 Row 14 - Cell 1 Row 14 - Cell 2
P/E Ratio7.144.08
Earnings Yield (A/H)20.00%20.00%
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Next76.20%211.40%35
Tesco15.40%411.80%26
Kingfisher13.90%612.60%17
Burberry77.60%16.40%78
Marks & Spencer16.80%310.50%69
Morrisons14.00%511.00%49
Sainsbury10.20%710.60%512

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

 

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

 

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.