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The Quant Quality and Value Strategy picks stocks by adding their ranks on two measures, return on capital (business quality) and earnings yield (price). It turns Joel Greenblatt's Magic Formula into rules.
Born in 1957 in the United States, he earned his bachelor's degree and MBA at Wharton. In 1985 he founded the hedge fund Gotham Capital and earned high returns for many years from special situations such as spin-offs, restructurings and mergers.
He has taught value investing at Columbia Business School since 1996, and wrote You Can Be a Stock Market Genius (1997) on special-situation investing.
He turned Buffett's principle of buying good companies at cheap prices into two numbers that anyone can follow: the Magic Formula of The Little Book That Beats the Market (2005).
Operating profit divided by enterprise value (market value plus net debt). It is similar to an inverted P/E, but because debt is included, companies with different capital structures can be compared. Higher means cheaper.
How much the business earns on the capital tied up in it. A business that earns 30 on 100 invested is better than one that earns 5. It is Buffett's moat approximated by a single number.
The method is fixed. Rank all stocks on each number, buy the 20 to 30 with the best combined rank, and pick again a year later.
Greenblatt explains that the formula keeps working because it goes through years of trailing the market. Past data showed stretches of two to three weak years in a row, and most investors quit during them.
So the most important rule of this strategy is not to quit in a bad year.
For banks and insurers debt is a raw material, which distorts enterprise value and invested capital, and utilities have returns set by regulators.
The formula cannot catch problems in a single company, such as accounting issues or lawsuits, so spreading the money is part of the method.
The more often you look and tinker, the more emotion creeps in and the formula's edge disappears.
This strategy model was independently built by Confluence Zone to quantify the investment philosophy in the works above. It is not an official model created, endorsed or reviewed by Joel Greenblatt or any related institution. Last reviewed: 2026-09-29
Related terms: Earnings Yield · ROIC
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