In defence of Magellan: Editor's Note

In Joel Greenblatt's investing classic, The Little Book That Beats the Market, the author details how he assesses his "magic formula" for beating professional investors at their own game. Under multiple stress tests, the formula demonstrates stunning long-term outperformance. However, over the short run, it fails to beat the market roughly once every four years.

"There are plenty of times when the magic formula doesn't work at all! Isn't that great? In fact, on average, in five months out of each year, the magic formula portfolio does worse than the overall market. But forget months. Often the magic formula doesn't work for a full year or even more," he writes.

But is this a reason for Greenblatt to ditch it?

No. His conviction in the magic formula sees him through thick and thin. In fact, he says if the formula worked all the time, everyone would probably use it and it would stop working.