InvestorQ : Can the assumptions in my magic formula go wrong?
Aashna Tripathi made post

Can the assumptions in my magic formula go wrong?

Answer
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natasha Samani answered.
2 years ago


Of course, assumptions can go wrong. In fact, a formula that has worked for the last 10 years can also go awfully wrong at times. That is part of the game. Joel Greenblatt, founder of Gotham Capital Hedge Fund, was a pioneer of “Magic Formula” based investing. His magic formula of high ROCE combined with high earnings yield returned over 40% return for 21 years in succession. But these magic formulas have certain assumptions. High growth and cheap money are implicit assumptions of this kind of a formula. It may be difficult to replicate that kind of performance in Indian markets where the macros may be entirely different. Always adjust your magic formula for unique conditions and specific circumstances.

The moral of the story is that these magic formulas (for want of a better word) help in creating scientific rules that are tailored to your personality. I always asked myself, “Would a Buffet style formula of perpetual investments work in India” Probably not. Remember that the leaders of the 80s, 90s and 2000s have been a different set of companies altogether. Trying to find long term value in that scenario will be as ambitious as it’ll be difficult. Rather, an Indian magic formula. That should work best in your case.