Joel Greenblatt averaged 40% annual returns. Not once. Not twice....
Compounding Quality@QCompounding
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May 23, 2025
~2 min read
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Joel Greenblatt averaged 40% annual returns.
Not once. Not twice.
But for over 20 years!
He shared his exact method in The Little Book That Still Beats the Market.
Here are the 10 biggest lessons:
Not once. Not twice.
But for over 20 years!
He shared his exact method in The Little Book That Still Beats the Market.
Here are the 10 biggest lessons:
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1. Stocks aren’t lottery tickets
They’re pieces of real businesses.
Owning shares means owning a slice of future profits.
That changes how you think about investing.
They’re pieces of real businesses.
Owning shares means owning a slice of future profits.
That changes how you think about investing.
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2. The market is moody
One day a stock is “hot.” Next week, it’s trash.
But businesses don’t change that fast. Prices do.
And that’s your edge.
One day a stock is “hot.” Next week, it’s trash.
But businesses don’t change that fast. Prices do.
And that’s your edge.
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3. Good investing is boring
Greenblatt didn’t chase trends.
He didn’t time the market.
He used a formula. Same thing, year after year.
And it crushed 99% of the pros.
Greenblatt didn’t chase trends.
He didn’t time the market.
He used a formula. Same thing, year after year.
And it crushed 99% of the pros.
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4. Buy great companies
How? Look for businesses with high Return on Capital.
These are companies that turn $1 into $1.20, $1.40 or more.
That’s what you want to own.
How? Look for businesses with high Return on Capital.
These are companies that turn $1 into $1.20, $1.40 or more.
That’s what you want to own.
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5. But don’t overpay
Even great businesses can be terrible investments…
if you pay too much.
So Greenblatt added a second filter: Earnings Yield.
(Profits relative to price.)
Even great businesses can be terrible investments…
if you pay too much.
So Greenblatt added a second filter: Earnings Yield.
(Profits relative to price.)
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6. The Magic Formula = quality + cheap
Step 1: Rank all companies by Return on Capital.
Step 2: Rank them by Earnings Yield.
Step 3: Buy the top 20–30 on the combined list.
Hold. Rebalance yearly. That’s it.
Step 1: Rank all companies by Return on Capital.
Step 2: Rank them by Earnings Yield.
Step 3: Buy the top 20–30 on the combined list.
Hold. Rebalance yearly. That’s it.
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7. You will doubt the formula
It underperforms sometimes.
People will call it outdated or broken.
But that’s the test: Can you stick with it?
It underperforms sometimes.
People will call it outdated or broken.
But that’s the test: Can you stick with it?
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8. Most investors fail this test
They get bored, they panic.
They quit when it doesn’t work instantly.
And that’s why this still works.
They get bored, they panic.
They quit when it doesn’t work instantly.
And that’s why this still works.
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9. Simplicity beats complexity
Wall Street loves fancy models and complicated strategies.
But Greenblatt proved:
A simple system + discipline > 99% of funds.
Wall Street loves fancy models and complicated strategies.
But Greenblatt proved:
A simple system + discipline > 99% of funds.
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10. You can do this
You don’t need to be a math genius.
You just need to trust the process.
And let the formula do its thing.
You don’t need to be a math genius.
You just need to trust the process.
And let the formula do its thing.
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11. Summary
Recap: The Magic Formula =
✔️ Great companies
✔️ Bought cheap
✔️ Held long-term
✔️ With zero emotion
It’s not sexy. But it works.
Recap: The Magic Formula =
✔️ Great companies
✔️ Bought cheap
✔️ Held long-term
✔️ With zero emotion
It’s not sexy. But it works.
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Greenblatt likes to keep things simple, just like me.
That's why I'd recommend a summary of all his public writings: compounding-quality.kit.com/e3f59a4723
That's why I'd recommend a summary of all his public writings: compounding-quality.kit.com/e3f59a4723