Two Masters, Two Completely Different Approaches
"Buy great businesses at a fair price." This sounds like Warren Buffett, but it's also the exact basis of Joel Greenblatt's Magic Formula. Although both investors are rooted in value investing, their execution is completely different. How do the Magic Formula and the Oracle of Omaha's strategy compare?
Warren Buffett's Strategy: Quality for the Long Term
Buffett looks at companies as if he wants to buy them outright. His strategy leans heavily on qualitative factors:
- Economic Moat: The business must have an insurmountable competitive advantage (such as a strong brand or monopoly).
- Management: Trustworthy and shareholder-friendly management.
- Horizon: "Our favorite holding period is forever." Buffett buys to hold for decades.
Joel Greenblatt's Strategy: The Quantitative Approach
Greenblatt strips out all emotion and qualitative analysis. The Magic Formula looks purely at two hard numbers: Return on Capital (quality) and Earnings Yield (price).
- Purely quantitative: No analysis of management or products. Pure mathematics.
- Mechanical: You buy a basket of 20 to 30 stocks based on a ranking.
- Horizon: Exactly one year. Then you sell and buy the new top stocks from the list.
The Key Differences at a Glance
| Strategy | Assessment | Holding Period | Concentration | Emotion |
|---|---|---|---|---|
| Warren Buffett | Qualitative + Quantitative | Years to decades | Highly concentrated | Requires business understanding |
| Magic Formula | 100% Quantitative | Exactly 1 year | 20 to 30 stocks | 100% Mechanical |
Which Strategy Is Right for You?
The Magic Formula is ideal for investors who want the benefits of value investing (quality at a low price), but don't have the time or skill to pore over annual reports the way Warren Buffett does. The Magic Formula essentially automates the core principles of Buffett's approach.
If, however, you want to truly own businesses you believe in for the long term — and you're willing to do the deep qualitative work that requires — then the Buffett method is your path.
Want to learn more about the man behind the formula? Read the full story of how Joel Greenblatt built his $50M track record. Or see how the Magic Formula compares to another popular strategy in our Magic Formula vs. Dividend Investing comparison.
