Formula Investing

Abstract

This study evaluates the effectiveness of four popular investing formulas—the F-Score, Magic Formula, Acquirer’s Multiple, and Conservative Formula—within a unified framework over an extensive period. Each formula generates significant raw and risk-adjusted returns, primarily by providing efficient exposure to well-established style factors. However, no single formula consistently outperforms across all metrics. The Acquirer’s Multiple achieves the highest returns for top decile portfolios, the Conservative Formula leads in CAPM alpha and return spread, and the Magic Formula exhibits the highest remaining alpha after adjusting for common factors. While all formulas remain successful for concentrated long-only portfolios in the post-2000 period, we observe some performance decay relative to earlier periods, underscoring the need for continuous innovation in investing strategies.

Keywords: Quantitative Investing, F-Score, Magic Formula, Acquirer's Multiple, Conservative Formula JEL Classification: G11

JEL Classification: G11, G12, G14