Magic Formula - Letter to subscribers - 10/01/2026
2025 Review
Disclaimer: This article is for informational and educational purposes only. Do not interpret anything below as financial advice. Always do your own research & speak to a financial professional before making investment decisions.
Happy New Year everyone.
2026 represents a big milestone for the QuantCompounding publication. I launched the newsletter in 2021 with a 5-year objective to test the Magic Formula investing strategy and outperform the S&P 500 index in the meantime.
Did the portfolio outperform? Time for some humble pie…
Annual Performance Since Inception
2021: -0.50% vs. 0.05% (-0.55%)
2022: -15.03% vs. -13.16% (-1.87%)
2023: 18.17% vs. 22.49% (-4.32%)
2024: 11.63% vs. 33.03% (-21.40%)
2025: -8.96% vs. 3.76% (-12.72%)
Total Return: 1.31% vs. 10.10% (-8.79%)
The data speaks for itself. In the last 5 years the S&P 500 has trounced my experiment portfolio by some 9%. From 2023 results got progressively worse. This is interesting because 2023 is around the time that I started to assume a more active role when picking stocks, as opposed to simply following the systematic approach described by Joel Greenblatt in his book.
I’m not naive enough to think that I fall in the miniscule percentage of investors that can successfully outperform the indices for many years, however, my unique experiment has certainly proved the following:
Outperforming the index is extremely hard
Fine-tuning the Magic Formula strategy (several times) worked against me
People are more interested in the journey than the results themselves
Let me take a few moments to explain the above.
From a pure returns perspective, clearly, I would have been much better off investing in the S&P 500 rather than pursuing this Magic Formula strategy. The almost 10% performance differential highlights that the additional hours of research/fine-tuning don’t make sense for the average investor from an opportunity cost perspective. That said, for those of us that enjoy the pursuit of investing and researching great businesses, allocating a small portion of capital towards entertaining endeavors like this one is a good way to scratch the itch.
The moment I started “optimising” the original strategy was the moment were returns started falling off a cliff. This harsh reality check is a visceral reminder of the fact that when it comes to investing, tinkering the portfolio is generally a bad idea. It’s no wonder Greenblatt said that the average investor won’t be able to follow the strategy for long enough to reap the rewards, and will often feel the urge to modify the painfully simple systematic methodology he outlines.
Finally, I have learnt that when it comes to the newsletter, what people really care about is the journey, not the investment results themselves. Since 2021, the newsletter has gone from 0 to 100 subscribers, despite the painful investment performance during the period. Sure, it’s a modest number, but I didn’t expect this number of people to engage with my content in all honesty. To those that have followed since the beginning, thank you, I really appreciate it.
What’s next?
In theory, the Magic Formula experiment officially ends on the 26th November 2026, exactly 5 years after we launched. So, we could be having an entirely different conversation depending on how the year plays out. I have plenty of conviction in Crocs and Ituran Location & Control, and while the latter has already returned c. 33% (including dividends) since my initial investment, Crocs has some catching up to do, down roughly 20% since I invested.
As always, I look forward to sharing updates throughout the year and have already started to think of the next big project once this one comes to an end.
QC