Why Doesn’t Mr. Greenblatt Run a Magic Formula Fund?

The reason this site exists is because Joel Greenblatt wrote a fascinating book that details a strategy for beating the market. The book captured the imaginations of perhaps millions of investors the world over, and inspired me to report on my experience following the strategy. Any prudent investor, however, before taking the plunge, mostly likely did a quick sanity check to find out exactly who this Greenblatt fellow is.

Mr. Greenblatt is an adjunct professor at Columbia University’s Business School, and recently has taught a course called “Value & Special Situation Investment”. He is a Managing Principal of Gotham Asset Management, which offers five different hedge funds, all of which use Value Investing principles and some degree of short positions.  The funds have not been around long but four out of five have under-performed the S&P 500 index since inception (some dismally), with only the Gotham Index Plus Fund (GINDX) outperforming. By the way, in the “Afterward to the 2010 Edition” of the The Little Book that Still Beats the Market, Mr. Greenblatt addresses a concept that, on the surface, seems like a good idea. In addition to buying those stocks ranked the best by the Magic Formula, why not also short stocks that were ranked lowest by the Magic Formula? These would be stocks with low Return on Assets and high P/E ratios.  Greenblatt writes that, if this long/short strategy were followed instead of the 100% long strategy, the results would have been disastrous a fund following this long/short combination strategy would have gone broke by the year 2000. So it’s surprising to me that every one of Gotham’s funds includes some level of  short positions, with one obvious fund missing altogether…

Why No Magic Formula Funds?

Since Mr. Greenblatt has admitted that his strategy, though relatively straight-forward, could in practice be difficult for the average shmoe to keep track of, I would think he would have a 100% long fund dedicated to his best-selling strategy both to prove the book’s strategy and as a convenience for the book’s readers. But no such fund exists. I would love to ask him why.