Thesis (MBA)--Stellenbosch University, 2015. / ENGLISH ABSTRACT: Portfolio managers and investors have developed numerous stock-picking strategies for managing
stock market portfolios, many of which have been researched extensively in international markets.
For example, research has shown that value stocks have higher returns than growth stocks in
markets around the world (Fama & French 1998).
A very popular value investing strategy is the ‘magic formula’ developed and published by Joel
Greenblatt, in 2006, in his book The little book that beats the market. This strategy is based on
constructing portfolios where return on capital and earnings yield are used as selection criteria.
Greenblatt (2010) provided results that showed that the magic formula strategy was able to
persistently outperform the United States stock market from 1988 to 2009.
This study provides a back-test of the magic formula on stocks listed on the Johannesburg Stock
Exchange for the period 1 January 1998 to 31 December 2013. The return was benchmarked
against the FTSE/JSE J203 All Share Total Return Index and several other popular value investing
strategies over the same period. It was found that, even after adjusting for risk, the magic formula
was able to consistently outperform the market index. While the magic formula was able to
outperform the market index, it was not the top performing value investing strategy evaluated in
this study. The magic formula was outperformed by the combination of size and book-to-market,
book-to-market alone, dividend yield, and earnings yield value investing strategies. While the
magic formula, and the above mentioned value investing strategies, were able to outperform the
market index in terms of overall geometric mean returns, there is not enough evidence to conclude
that these value investing strategies outperformed the market index by a statistically significant
margin.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:sun/oai:scholar.sun.ac.za:10019.1/97332 |
| Date | 04 1900 |
| Creators | Howard, William Ford |
| Contributors | Krige, J. D., Stellenbosch University. Faculty of Economic and Management Sciences. Graduate School of Business. |
| Publisher | Stellenbosch : Stellenbosch University |
| Source Sets | South African National ETD Portal |
| Language | en_ZA |
| Detected Language | English |
| Type | Thesis |
| Format | ix, 77 pages |
| Rights | Stellenbosch University |
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