Joel Greenblatt’s “Magic Formula” for picking stocks, a simplified version of the value investing approach that made him one of the most successful hedge fund managers of his generation, has underperformed a basic S&P 500 index fund on a rolling five-year basis for a full decade. The formula’s streak of trailing the market began in 2016, according to Alexander Hübbert, a postdoctoral finance researcher at Stockholm University who tracks its performance.
The decline is significant because the formula once produced returns that looked almost too good to be true — and because the factors behind its fade illustrate a broader truth about quantitative investing strategies: the more widely a winning formula is adopted, the harder it becomes to beat the market with it.
Greenblatt, whose firm Gotham Funds produced 40% annualized returns during its peak years, described a simplified stock-ranking system in his 2005 bestseller “The Little Book That Beats the Market.” The strategy ranks stocks on two metrics: earnings yield and return on capital. Stocks that score well on both measures are purchased, held for a year, and replaced. Backtested results showed 31% annualized returns over the 17 years of data available at the time — turning a $10,000 investment into nearly $1 million.
The formula continued to beat the market for roughly a decade after the book’s publication. Since 2016, however, its rolling five-year premium relative to the S&P 500 has been negative, according to Hübbert’s research.
Hübbert has offered two explanations for the erosion. One is the well-documented dynamic in which a strategy’s performance fades the more widely it is known and adopted. The other is that the formula’s value orientation may simply be out of step with a market environment dominated by technology stocks and artificial intelligence. “I guess that some of the alpha (outperformance) may come back when the strategy has been out of favor for a while, but it is not a guarantee,” Hübbert said in written remarks about his findings.
Greenblatt, whose firm Gotham Funds did not respond to messages seeking comment, has spoken publicly about the likelihood of trailing the market for extended stretches. He has described these periods as “time arbitrage” — the idea that most fund managers cannot survive long runs of underperformance because investors pull their money, which keeps the superior strategy from becoming overcrowded and helps preserve its long-term effectiveness.
The approach does face practical hurdles beyond a simple patience requirement. Stocks with more than $1 billion in market capitalization that currently qualify under Greenblatt’s free online screener include Altria, H&R Block, Cigna, Yelp, Korn Ferry, Gartner, Versant Media, and Crocs. Cherry-picking only those without obvious weaknesses from such a list could hurt results compared to following the formula mechanically.
For investors convinced the formula can regain its effectiveness, exchange-traded “smart beta” funds that screen for many of the same factors now exist, including some launched by Gotham itself. These funds are more tax-efficient than the buy-and-sell rotation the book describes, which involves substantial portfolio turnover.
The formula’s struggles coincide with a period of extraordinary stock market strength. April and May 2026 made up one of the best two-month stretches for U.S. equities in market history, according to the Wall Street Journal’s reporting. Previous comparable instances came mainly after severe bear markets rather than during a war or at a time when valuations were already near record highs. Oil prices rose overnight on fresh Iran strikes, and stocks were set to open June with additional gains.