Magic formula investing

If we are going to build real generational wealth, we have to rewire our brains to recognize what a business is actually worth, which brings us to the core concept.

Before we can dive into the 17-year study or the complex mechanics of the magic formula, we need to establish an absolute foundational understanding of business valuation.

Right.

You have to start with the basics.

You're saying we can strip out all the subjective human judgment and build a quantitative model that just hunts for the math behind Buffett's success?

Exactly.

Greenblatt codified this into what he cheekily called the magic formula.

It strips away the complex forecasting models, the Wall Street jargon, and the talking heads, and boils the entire philosophy down to a clear two-part systematic screening process.

And Joel Greenblatt makes the idea even more explicit.

His famous magic formula is, essentially tries to combine two things a good business and a good price and one of the key measures that Greenblatt uses to identify the good business is return on capital his reasoning is intuitive if one business can invest a given amount of money and generate a very large return from it while another invest exactly the same amount and generates very little which business would you rather own And again, none of this means that high ROIC automatically equals a good investment because the price you're buying it at still matters.

The durability of the company still matters.

The debt levels matter.