You've read the book. You understand the logic: buy good businesses at cheap prices, repeat every year, let the math work in your favour. Joel Greenblatt proved that systematically owning stocks with high earnings yield and high return on capital produces market-beating returns over time — and the best part is that you don't need a Bloomberg terminal or a Wall Street salary to do it. You just need a list and discipline.

So why doesn't everyone do this? Partly because if the whole market piled into Magic Formula stocks the edge would disappear. But mostly because the list, on its own, doesn't tell you which stocks are worth buying right now. It tells you which stocks are quantitatively attractive. That's not the same thing.

The Problem With Cheap

A stock that ranks highly on earnings yield and return on capital is cheap relative to its earnings. But sometimes it's cheap for a reason.

Maybe those earnings aren't going to repeat. The company had a one-time contract, or sold a division, or benefited from a commodity price spike that has since reversed. The Magic Formula doesn't know that — it only sees last year's numbers.

Maybe there's a short-seller report alleging fraud, or an SEC investigation ticking away in an 8-K footnote. The formula doesn't read footnotes.

Maybe the balance sheet is quietly deteriorating. High earnings plus a debt maturity wall equals a potential trap.

Maybe the company operates in a fiercely cyclical industry — shipping, chemicals, defence subcontracting — and is currently sitting at a peak it won't see again for years. The formula ranks it highly exactly when you should be most cautious.

Greenblatt acknowledged as much. The whole premise of The Little Book is that the formula works on average, across a diversified portfolio, over a full market cycle. Individual stocks will fail. The strategy survives because the hits outweigh the misses. But knowing in advance which stocks are carrying specific, avoidable risks — that's not cheating the system. That's just doing your homework.

What MagicDiligence Does

MagicDiligence starts with the same list you'd get from the official Magic Formula screen: the top 50 stocks with a market capitalisation above $250 million, ranked by combined earnings yield and return on capital. Then it runs each one through a quick, AI-assisted due diligence review built around four checks.

Non-recurring revenue. Does the earnings figure reflect the ongoing business, or was there a one-time windfall — a divestiture, an insurance payout, a customer contract that has since expired? A stock that only looks cheap because of last year's anomaly isn't a Magic Formula opportunity; it's a data artefact.

Fraud and short-seller allegations. Active short-seller campaigns, SEC investigations, accounting restatements, and credible misconduct allegations are all reasons to pause. These aren't always right, but they deserve to be flagged before you commit capital.

Financial health risks. A profitable company can still be in financial distress. High-yield debt coming due in a rising-rate environment, covenant violations, liquidity concerns, or going-concern disclosures can wipe out earnings-based upside fast.

Peak-cycle earnings. Some businesses earn extraordinary returns at the top of an industry cycle — when bulk shipping rates are elevated, when commodity prices are stretched, when a defence contract boom is running hot. When the cycle turns, earnings revert sharply. A stock ranked near the top of the Magic Formula during a cyclical peak may be the worst time to buy it.

Each stock gets a simple verdict: ✅ Pass (none of the four flags were raised) or ❌ Fail (at least one concern was found). Click the ticker to read the full report explaining exactly what was — and wasn't — found.

Who This Is For

If you're running a concentrated Magic Formula portfolio — say, 20 to 30 stocks — you probably want to avoid the obvious banana peels. MagicDiligence gives you a fast, structured way to do that without spending hours on each name.

It won't pick your winners. Nothing does that reliably. But it can help you skip the stocks where the quantitative signal is real but the qualitative picture is broken — and that alone can meaningfully improve your long-run results.

The Magic Formula works because it's systematic. MagicDiligence just adds one more systematic step at the end.