The Little Book That Still Beats the Market (Joel Greenblatt)

• Buy companies with high return on capital at low prices (i.e. high earnings yield).
  • ROC = EBIT / (Net Working Capital + Net Fixed Assets)
    • Remove goodwill
  • EY = EBIT / EV
    • EV = Market Cap + Interest-bearing Debt
  • Magic formula: rank companies by ROC and by EY. Add the two ranks to create the combined rank. Buy the first 30. Rinse repeat every year. Adjust as appropriate to optimize taxation and fees.
  • Sell winners after a bit more than one year and losers after a bit less than one year (this is related to US taxation, but in Germany some tax optimization is also possible).
  • This only works over long term horizon. That's how we avoid everyone piling into this strategy.
  • It also only works on average, so you want some degree of diversification. That's why we say "30 top stocks" and not just one.