Magic Formula Stock Screen Explained

magic formula investing stock screener

You don’t need a wand to find investing ideas with this magic stock screen investing formula…

The Magic Formula Stock Screen is an investing methodology developed by famous value investor Joel Greenblatt. The Magic Formula investment approach can make it easy to find great value investing ideas. And beyond just finding ideas, the magic formula helps you execute the investments too!

And the truth is…

Even though the Magic Formula stock screen has been around for a few years, it is still very popular with contemporary value investors. I was particularly intrigued by the Magic Formula stock screener when it was mentioned in The Manual of Ideas and The Dhandho Investor. Plus, Greenblatt states the magic formula stocks beat the S&P-500 96% of the time (reference).

If the Magic Formula stock screener is good enough for those guys, it’s worthy of my attention. So let’s get down to business…

The Magic Formula Stock Screener Explained:

The Magic Formula Stock Screen is pretty simple. So you can get started using the stock screener yourself once you understand the basic components that go into selecting magic formula stocks. The main thing to keep in mind is that the magic formula stock screen isolates stocks with high earnings yield and high return on capital. The idea is to diversify into about 30 of these stocks and rebalance once per year.

Here are the specifics of what you should look for (courtesy of Wikipedia) if you want to do some magic formula investing…

Magic Formula Investing Formula

The magic formula stock screen is easy to manage and implement. Use these steps to find stocks that fit the magic formula investment criteria.

As you can see, the magic formula is actually pretty simple. And it’s very easy to follow because the formula includes specific steps of when you should buy and sell stocks. If you want to get an average 30.8% annual return with only doing one day of research per year this is your ticket to success. No wonder they call it the magic formula!

If you want to try some magic formula investing for yourself, you can use an online stock screener to get started. Or you can sign up at Now let me suggest…

Tweaks to The Magic Formula Stock Screener:

As always, stock screeners are only a starting point. And they can always be improved upon. If you want to further refine the magic formula stock screen there are a couple of things you could do to even further improve your odds of your success. To be sure, these aren’t condoned magic formula investing ideas. But it’s fun to find new ways to sort and sift the best magic formula stock ideas.

To get started…

One thing I would do is combine the magic formula stock screen with the results from some of the other best value investing stock screeners. So for example, you could add additional filter criteria to your screen to find stocks that fit the magic formula stock screen AND also have insider buying… Or… you could be looking at stocks that are on the magic formula stock screen AND are within 10% of their 52 week highs (e.g. they have some price momentum). See what I mean?

There are truly no limits to how you can use the magic formula stock screen as a jumping off point for finding stock picks and investment ideas. I encourage you to overlay your favourite fundamental or technical analysis criteria to find magic formula stock picks that fit your preference. Of course, the beauty of magic formula is that you don’t need to tweak it. But sometimes us curious investors hunting for the best deal just can’t help ourselves!

And By The Way: If you’re looking for more information on how to find valuable stock picks and ideas I encourage you to sign up using the form below. You’ll get a free copy of my 12 page ebook on how I developed my approach to the stock market. And I’ll also send you the best tools, tips and resources each week to help you improve your stock trading and investing. 

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