MICHEL PIREU: Is a magic stock market formula too good to be true?
If someone offered you a magic formula for making "easy" money in the market, would you use it? Would you even bother to look at it? Or would you look at it and try to improve on it? And what would that tell us about investors’ response to a sure thing? In The Little Book that Beats the Market, Joel Greenblatt promotes an investment strategy he calls "the magic formula". At the time of writing — the book was published in December 2005 — Greenblatt claimed the formula beat the S&P 500 index 96% of the time with an average 17-year annual return of 30.8%, compared to the S&P’s 12.4%. That would have turned $10,000 into $960,000, instead of $73,000, between 1998 and 2004. This period included both the internet bubble and the market crash of 2000-02, and while the formula didn’t beat the index every year, it did so in any period lasting three consecutive years or more. In 2009 John Reese, who tracks "guru strategies", confirmed the magic formula had again beaten the market in each of the...
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