Magic formula vs. traditional value investment strategies in the Finnish stock market

For the first time in a smaller market setting, we compare the performance of the magic formula proposed by Greenblatt (2006) against the most commonly used value investment strategies. We also test whether the cash flow-augmented magic formula is superior to other strategies. We find that while all tested value strategies consistently beat the market in the period 1991–2013, a strategy based on EBIT-
to-enterprise-value ratio yields higher risk-adjusted returns on average. Furthermore, while the overall performance of the pure magic formula is not among the best, our findings show that the augmented magic formula yields the highest excess return during bull periods. The results also indicate that the reported abnormal returns are not compensation for higher level of risk.