Value & Special Situations
Joel Greenblatt
Special situations and spinoffs hide value the crowd ignores - and the magic formula has limits.
Joel Greenblatt is an American investor who became famous for earning very high returns over many years, especially in the messy, ignored corners of the market called special situations. He is best known for a simple idea he cheerfully named the ‘magic formula’: buy businesses that are both good (they earn a lot on the money they use) and cheap (you pay little for their profit). He explained his thinking in plain-English books written for ordinary people, not just experts. He always said the formula is not really magic - it is a sensible rule with real limits.
The method
Look where the crowd is not - in spinoffs, splits, and small, dull, unloved companies - because bargains hide where few people are watching. When picking, ask two questions together, never one: is the business good, and is the price cheap? Rank companies on both, hold a basket of the best, and wait years, since the reward comes slowly and the road is bumpy.
The record
Greenblatt’s results come mostly from old American markets over past decades, and his own books report unusually high long-run returns from special situations and from the magic-formula idea. Those are past results in another time and place. Past results are never a promise about the future, and nobody should expect the same numbers.
Where they were wrong
The magic formula has long, scary stretches where it does worse than the crowd, and most people quit during the bad stretch and miss the payoff. When many people copy the same rule, their buying erases the bargain and it works less well. Numbers alone can be fooled - a one-time gain can make a weak, dear business look good and cheap. And special situations like spinoffs need real work and honest judgement; a cheap, ignored company can be a forgotten bargain or a dying trap, and the formula cannot tell which.
Studies
6- Study 01Special situations: bargains in the boring cornerThe bargain is rarely in the crowd; walk to the quiet corner, do the boring work, and check what the business is truly worth.Read this study →
- Study 02Spinoffs: the piece nobody choseWhen a spinoff falls, ask whether it is unwanted or truly weak - careless selling makes bargains, but a bad business handed a bad start does not.Read this study →
- Study 03The magic formula: good and cheap, ranked togetherInsist on good AND cheap together; a great business at a silly price and a cheap weak business both fail the test.Read this study →
- Study 04Good and cheap together: why you need bothBoth halves or neither: a great business at a silly price and a cheap dying business both lose - only good and cheap together wins.Read this study →
- Study 05Patience and the formula: sitting through the dipThe fruit is at the far end of a bumpy road; the reward belongs to whoever does not pull out the tree during the dry years.Read this study →
- Study 06Where formulas break: no rule is magicA formula finds candidates, not answers; use it to narrow the field, then do the honest reading yourself, because no rule can think for you.Read this study →
Primary sources
full register →Read Joel Greenblatt in their own words. We reproduce none of it - these are the real things to go to.
The Little Book That Beats the Marketbook
Introduces the 'magic formula' of buying good businesses at cheap prices, ranked together. - available wherever books are sold - please buy the book
You Can Be a Stock Market Geniusbook
Greenblatt's guide to finding value in special situations like spinoffs, mergers and restructurings. - available wherever books are sold - please buy the book