The magic formula is Greenblatt's rule for buying good companies at bargain prices: rank stocks on how cheap they are and how high a return on capital they earn, buy the best-ranked, and replace them after about a year.
He set it out in The Little Book That Beats the Market (John Wiley & Sons, 2005), updated as The Little Book That Still Beats the Market (2010), which adds an introduction and afterword with data to the end of 2009. We could not fetch the book's full text, so the definitions below come from Greenblatt's own Magic Formula Investing website, which is owned by an entity he partly controls.
The site's FAQ says the screener looks for "stocks with low P/E ratios ('cheap stocks') that also achieve high returns on capital ('good companies')", with "slight accounting adjustments". It covers US-listed shares only and excludes financial companies and utilities. Its instructions, on the site's How it Works page and in the FAQ:
- hold at least 20 formula stocks, in equal dollar amounts;
- keep each for about a year, selling losers just before a year and winners just after, for tax reasons;
- spread a large purchase over 12 months;
- commit for at least three years.
The FAQ adds: "First, there is nothing 'magical' about the formula." It also says that anyone who "cannot afford to lose money in the market" should not use the system.
In Chapter One of the 2010 edition, Greenblatt warns that the method depends on conviction: "Unfortunately, if you don't believe the magic formula will make you rich, it won't." (page 6).
What does Gotham Asset Management hold now?
At 31 March 2026, Gotham Absolute Return Fund (GARIX) held long positions worth 120.6% of its $1,074.4m net assets and short positions worth 60.3%, by our calculation from its semi-annual report. It owned $940.1m of shares directly and gained the rest of its long exposure, and all of its short exposure, through total return swaps with Morgan Stanley. The report lists 1,775 holdings.
A later monthly portfolio report, the Form N-PORT for 30 June 2026 filed on 21 August 2026, shows a similar book. By our calculation from its stock and swap lines, the fund was about 120% long and 60% short, with net assets of $1,235.6m. The chart keeps the March semi-annual report, whose swap tables state each book's market value directly.
At 31 March 2026, Gotham Absolute Return: long 120.6%, short 60.3%, net 60.3% of net assets; Gotham Neutral: long 122.4%, short 97.3%, net 25.1%. Source: Gotham Funds Form N-CSRS, 31 March 2026, portfolios of investments and total return swap tables; chart data (CSV). Gross exposure, longs plus shorts, was 180.8% for Absolute Return and 219.6% for Neutral.
The prospectus dated 1 February 2026 describes a broader process than the book's two ratios. Gotham values every company in its universe from "recurring earnings, cash flows, capital efficiency, capital structure, and valuation", weights the long book towards the largest discounts to its value estimate and the short book towards the largest premiums, and rebalances generally daily.
For Absolute Return it aims to keep net exposure below 70% and gross exposure generally below 190%; for Neutral, net exposure of about 0% to 30%. Greenblatt and Robert Goldstein are co-chief investment officers and have managed the fund since its launch in 2012. Each owned more than $1m of its shares at 30 September 2025.
The structure has costs. The management fee is 1.50% a year, total operating expenses after waivers are 1.52%, and swap costs come on top; turnover was 290% in the last full fiscal year.
Gotham Absolute Return returned 8.94% a year in the ten years to 2025, against 14.82% for the S&P 500 Total Return Index and 4.75% for the HFRX Equity Hedge Index, according to its prospectus. From its launch on 31 August 2012 to the end of 2025 it returned 8.96% a year. The market comparison is uneven: the fund targeted 50% to 60% net long exposure in 2015 and keeps it below 70% under its current prospectus, while an index fund is fully invested.
Cumulative return, Gotham Absolute Return against MSCI World: 2015 to 2020, 6.1% against 76.2%; Q1 2020, -16.8% against -21.1%; 2022, -5.0% against -18.1%; January 2021 to September 2026, 130.0% against 98.2%. Source: copio calculation from Yahoo Finance fund prices and MSCI index levels, checked against the prospectus bar chart; chart data (CSV). Our fund series reproduces each calendar-year return in the prospectus for 2016-2025 to within 0.01 percentage points.
The whole fund lost less than MSCI World in these two falls. These total returns do not isolate how much the short book contributed. The fund lost 5.0% in 2022, when MSCI World lost 18.1%. In the first quarter of 2020 it lost 16.8%, its worst quarter of the ten years shown in the prospectus, close to the index's 21.1% fall despite its lower net exposure.
Its largest month-end drawdown since launch was 17.0%, against 25.4% for MSCI World, by our calculation over September 2012 to September 2026. In 2026 to the end of September, it gained 15.5% against 11.8% for the index.
Yes, and Greenblatt has said so in writing. In the fund's 2015 annual report, after a year in which "all of the funds" produced negative returns, he and Goldstein wrote: "No investment strategy, regardless of how good or logical, works all the time."
The next sentence reads: "The important thing for us is to stick to our strategy even if it is not working over shorter time periods." They added that for a single stock "the waiting period for the market to get it 'right' is no more than 2 or 3 years in the vast majority of cases".
The wait in 2015 turned out to be longer. The 2020 annual report repeated the same two sentences and said the short book "has been challenged in this market environment resulting in negative long/short spreads". By Gotham's measure, "only 1999 ranks worse than the first six months of 2020 for the returns of cheap stocks minus expensive". The fund returned -4.13% in its year to September 2020, against 15.15% for the S&P 500 Total Return Index.
Cliff Asness's AQR research shows how value can be paired with styles that tend to move against it, and Terry Smith's Fundsmith shows a quality fund that lagged in a different stretch.
What does a lagging strategy do to crash risk and compounded growth?
A strategy that lags for years tests whether it still fits an investor's funding needs and investment thesis. Fund returns describe money continuously invested; cash flows change the return experienced by the average invested dollar. Gotham Absolute Return's net assets peaked at $3.66bn on 30 April 2015 and fell to $506.0m by 30 September 2020. Most of the fall was withdrawals, not losses.
Net flows into Gotham Absolute Return: year to April 2015 +$2,135m; May-September 2015 -$831m; years to September 2016 -$1,600m, 2017 -$187m, 2018 +$123m, 2019 -$216m, 2020 -$303m, 2021 -$77m, 2022 +$58m, 2023 -$14m, 2024 +$18m, 2025 +$234m. Source: Gotham Funds annual reports on Form N-CSR, statements of changes in net assets, 2016-2025; chart data (CSV). The flows include reinvested distributions.
The reported periods show large flows after both gains and losses; they do not reveal each investor's reason for trading. The fund drew $2.1bn in the year to April 2015, then lost 7.83% in the next five months; $831m left in those months and $1.6bn more in the following year. After a 31.53% gain in the year to September 2024, net subscriptions in the following year were $233.9m, the largest since the year to April 2015.
The gap shows up in compounded wealth. From 30 April 2014 to 30 September 2025, the fund itself grew at 7.0% a year, a time-weighted return that ignores when money came and went. Weighting by the money actually invested, the fund's shareholders as a group earned about 2.2% a year, by our estimate from the reported flows and net assets.
MSCI World grew at 10.4% a year over the same dates. The estimate places each period's flows in the middle of the period; moving them to the start or end changes it by less than 0.1 percentage points.
This is an aggregate estimate, not a reconstruction of individual accounts or proof of avoidable timing losses. For a household, record why money entered or left before deciding whether a return gap calls for a different process. Our crash recovery guide shows why recovering from a loss takes more than the loss itself, and our comparison of the Sharpe ratio and CAGR explains why compounded growth is the measure that counts for a balance.
Four common shortcuts in retellings of the magic formula conflict with Greenblatt's own materials.
- "It is magic." The FAQ says there is nothing magical about it and that similar formulas also work quite well.
- "It works every year." The FAQ asks for at least three years, and the 2015 and 2020 letters describe periods when the approach did not work.
- "Gotham runs the magic formula." The prospectus describes several hundred long and short positions, weighted by Gotham's own valuation and rebalanced daily, not a 20- to 30-stock annual list.
- "Any screener reproduces it." The site applies accounting adjustments, excludes financials and utilities and covers US-listed shares only.
What does copio think of this portfolio?
Gotham shows that holding many positions does not remove strategy risk, and that a short book is not a contractual crash floor. The whole fund lost 16.8% in the first quarter of 2020; that is not the standalone return of its shorts. Its 120.6% long and 60.3% short exposure in March 2026 left substantial net equity exposure as well as stock-selection and valuation risks.
The estimated investor-return gap is a useful description of when capital was invested, but does not prove that all withdrawals were poor decisions. Copio does not grade the fund because its long/short positions and swaps cannot be entered cleanly as an ETF portfolio.
Three checks for your portfolio
- Write down what a lean period would look like. Compare the strategy with a suitable benchmark over rolling multi-year periods, including the 2015-2020 stretch in this study. Record which evidence would change your thesis and when you will review it. Separate an expected period of underperformance from changes in mandate, costs or risk; a promise to hold forever is not a review rule.
- Inspect both sides of a long/short fund. Record gross long, gross short and net exposure, plus swap, borrowing and fund costs. Check how the whole fund behaved in both 2020 and 2022 before assuming its short book supplies crash insurance. To judge the shorts themselves, obtain their return attribution; the total fund result cannot supply it.
- Measure the result on your money without guessing at motives. Use dated deposits, withdrawals and distributions to calculate a personal money-weighted return. Compare it with the fund's time-weighted return over your holding period, then review which cash movements were discretionary and which funded real spending. Before adding another fund, check whether it repeats the same equity and valuation exposures.
Our AQR study examines combining different investment styles. The portfolio checker can help explore supported funds, but does not reconstruct Gotham's short book.
FAQ
What is Joel Greenblatt's magic formula?
It is the stock-selection method from Greenblatt's book The Little Book That Beats the Market (2005, updated in 2010 as The Little Book That Still Beats the Market). His website describes it as screening for stocks with low price-to-earnings ratios that also earn high returns on capital, after small accounting adjustments, and says there is nothing magical about it.
How long should you hold magic formula stocks?
Greenblatt's Magic Formula Investing site says to hold at least 20 stocks in equal amounts for about a year, then rebuild the list. It strongly recommends committing to the approach for at least three years, and says that people who cannot afford to lose money in the market should not use it.
What does Gotham Asset Management invest in?
Gotham's long/short mutual funds, such as Absolute Return and Neutral, hold several hundred long positions in shares it judges undervalued and a similar number of short positions in shares it judges overvalued, rebalanced generally every day; its Large Value Fund holds long positions only, according to the 1 February 2026 prospectus. At 31 March 2026, Gotham Absolute Return Fund was 120.6% long and 60.3% short, a net exposure of 60.3% of net assets, by our calculation from its semi-annual report.
Has the magic formula approach had long losing stretches?
Yes. Gotham Absolute Return Fund gained 6.1% in total over 2015-2020 while MSCI World rose 76.2%, by our calculation. Its ten-year return to 2025 was 8.94% a year against 14.82% for the S&P 500, according to its prospectus. It then gained 130.0% from January 2021 to September 2026, against 98.2% for MSCI World.
Why did Gotham's investors earn less than the fund?
Our aggregate cash-flow estimate is about 2.2% a year from May 2014 to September 2025, against 7.0% for the fund. It reflects when capital was invested: large withdrawals followed weak periods and later inflows followed gains. It does not establish each investor's return or prove that the entire gap came from avoidable timing mistakes.
