One of the arduous challenges faced by investors is dealing with periods of underperformance. Different investing styles tend to suit different market conditions. So it doesn’t matter what the strategy is, there’ll always be times when it just doesn’t work. For those with a preference for a certain style, the discipline is in staying the course and sticking with the rules.
Few will know this better than followers of Joel Greenblatt’s Magic Formula. Greenblatt, an American fund manager, is behind a strategy that uses a simple combination of value and quality in its search for winners. It looks for good businesses at bargain prices, which Greenblatt claims “is the secret to making lots of money” (in his book, The Little Book that Beats the Market).
The trouble is that even cheaply priced, good stocks don’t always perform well as a whole in the stock market. For instance, investors in US markets have found in recent years that very expensive growth stocks can stay popular for a surprisingly long time. In these phases, nobody wants to buy value stocks, no matter how good are. And even when value does come into fashion there are times when individual shares simply implode. And that’s exactly what we…
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