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Hi everyone, my name is Maurício Gam and in this video you'll learn about the Magic Formula, a strategy that has been working for almost 40 years to find the best stocks on the stock market in a completely systematic way. And as usual, I'm going to put the presentation on the screen now so we can continue with this video.
But first, a very important message for those of you who are just arriving on the channel: click the red subscribe button so you can stay updated on future videos. And as you enjoy the content you're watching, click the "like" button, because that helps me get this video to more people too. Message received, let's get straight to the point.
Magic formula to beat the stock market. This is a strategy that was developed by Mr. Joel Greenblatt, who is one of the leading managers in the United States . And it was first introduced in his book, The Magic Formula by Joel Green Blat. "To Beat the Stock Market," which is a book that was even translated into Portuguese and ended up attracting a lot of attention from Brazilian investors, because the proposed strategy is very different from other previous strategies presented here in Brazil, which focused on investing only in cheap stocks and good dividend-paying stocks.
And this Magic Formula strategy comes with a different approach: finding good companies and good businesses to invest your money in, using 100% objective rules. So in practice, what are the actual rules presented in the book by Joel Green Blood? Very simply, you will list the cheapest stocks on the stock exchange.
Next, you will list the most profitable stocks on the stock exchange, then combine their rankings from both lists, and finally invest in the 30 highest- ranked stocks from this combined ranking. And later in this video, I'll show you all these criteria in more detail so you can also apply this strategy to the Brazilian stock market.
But looking now at the results of this application, of this methodology in the American stock market, which are the results presented in the book itself. So, according to the study that Joel Green Blat himself conducted on the American stock market between 1988 and 2009, those who followed the magic formula throughout that entire period managed to achieve an average return of 23.8% per year.
Meanwhile, during that same period, the US dollar index yielded 9.6% annually. So, right off the bat, we can see that in the American stock market, the strategy managed to deliver a return far superior to the market average. And to give you an idea, if you had started investing back in 1988,000 in the S&P 100500 index, by 2010 you would have 74,400.
In the magic formula, those same $10,000,000 turned into $1 million , meaning you managed to earn much more money with the magic formula than if you had, for example, invested in the S&P 500. And the great advantage, the key to the magic formula strategy, is using 100% objective rules based on the evaluation of two different filters.
The first filter for listing the cheapest stocks is the EVBIT indicator. And the second filter used to find profitable stocks is the ROIK indicator. Calculating the EVBIT indicator is quite simple, and it's also a fairly easy piece of data to understand. EVBIT, like any other price indicator, will help you find cheap stocks, discounted stocks, and assets with high potential for appreciation relative to your annual profit.
And in the specific case of EVBIT, this data will measure the relationship between EV, which is the enterprise value of the company, and EBIT, which is the profit before considering interest and taxes that the company paid. The lower the result of this indicator, the lower the EVBIT, the cheaper that stock is and, therefore, the better it will rank within the strategy.
And you'll find the formula below. So all you need to do is take the company's market value plus its net debt and divide it by its EBITDA for the last 12 months. Below you will also find the formula for both market value and net debt. So, market capitalization is simply calculated by taking the share price and multiplying it by the total number of shares that company has on the stock exchange and its net debt.
Simply take the gross debt, that is, all the loans and financing that the company has in the short and long term, minus the cash, which is the money it actually has in its account. By performing both calculations— market value, net debt—and using the EBIT data from the last 12 months in the company's income statement, you will be able to calculate the EVBIT indicator.
And the next indicator is precisely the HOIK, which serves to measure how profitable a business is. And effectively, EV, HOIK, will measure the relationship between the company's profit before taking into account the interest it paid in relation to all the total capital invested in its operation, because that way you will be able to get a general idea of whether the money being invested in that business is generating a significant result.
Unlike EVBIT, the higher the ROIK value, the better the company, because it has achieved greater profitability in relation to the money invested in its operations. And the formula is quite simple as well. Simply take the company's EBITDA for the last 12 months, minus the taxes it actually paid in the same period, and divide that by the company's total capital, which is its equity, shareholders' money, plus gross debt, which is third-party capital acquired through bank loans and financing.
And how will you actually combine the information? How will you use EVBIT to find cheap stocks at the same time ? and at the same time profitable companies through a fairly simple system, a combined ranking system , as you can see now. But first, I'll show you how both indicators can be calculated, and then how this ranking system can be applied.
I will consider the data from the Irani company with the stock code Honey 3 RA NI3. Here on the left we have the data that will be used to perform this calculation. They're all in the thousands, meaning I ended up not including the last three zeros to avoid making it too cluttered with information. So, the first calculation is that of the EVBIT indicator.
So, I'm going to take the market value plus the company's net debt figure and divide it by its EBIT. So, we have 2.1 billion plus 1 billion more divided by 447 million. And the result of that calculation is 7.14. Is it a low EVBIT, is it a high EVBIT? We'll understand when we get to the ranking system part.
And the second metric, which is also very simple to calculate, is ROIK. 447 million, which is the company's IBIT (income tax), less taxes paid, 26 million, divided by equity 1.4 billion, plus gross debt, 1.9 billion. By performing the subtraction below, adding and dividing one piece of data by the other, and finally multiplying by 100 to arrive at the percentage, we find that Irne's company's profit margin is 12.53%.
Now that's a combined ranking system . And how will it actually be implemented? Before you try to check Iran's position on the stock exchange using a magic formula strategy, it's important to do this calculation for all other companies listed. So you're going to calculate the EVBIT and ROIK of Porto Seguro, Movida, CIA, and indeed, all the companies listed on the stock exchange.
Next, you will rank the stocks with the lowest EVBIT. which will fit perfectly into the price ranking to find the cheapest stocks on the stock exchange. Using this ranking system logic , we see that Irene occupied the 46th position among the cheapest stocks on the exchange. So she's not ranked that highly after all.
In terms of profitability ranking, looking at the stocks with the highest ROI, Irene is also not well- ranked, occupying position 44. And to apply the combined ranking system uniting both pieces of information, you just need to add the positions in the two rankings, 46 + 44, resulting in the number 90, and compare this sum with all the other companies on the stock exchange.
And by making that comparison, I was able to verify that Iran was only the 36th best stock on the exchange according to the magic formula. And following the rules of the book itself, which suggests you only invest in the 30 best stocks from the Magic Formula, IRNE ended up being left out if you were building a portfolio today on the Brazilian stock exchange with the best assets from the Magic Formula.
Furthermore, if you want to understand in even greater depth how this type of strategy can be applied, including learning about the method I currently use in my portfolio, which follows these same principles but uses other filters that have generated even greater results than the magic formula through my method called the "momentum value method," I invite you to click on the first link in the description to access the e-book I wrote, which presents everything about this method in detail.
Then all you have to do is go ahead and click on the first link in the description. Message delivered. Let's go back to talking about the magic formula. Now, moving away from theory, from what 's in the book, and turning to a study I conducted myself within the Brazilian stock market to verify if it's a valid strategy to apply here in Brazil.
So, what criteria did I use? Four fairly objective criteria. The first criterion is to eliminate stocks with a negative EV or EBIT. According to the criterion mentioned in the first item, eliminate stocks with a negative ROIK or above 100%, and finally eliminate those stocks with liquidity below R$ 500,000 per day, already adjusted for inflation.
Once criterion one is finalized, we will eliminate a large portion of Brazilian companies that are losing money, have negative rock, or have very low liquidity. Next, we have criterion two, which is precisely the combined ranking system. I will list the stocks with the lowest EVBIT, list the stocks with the highest HOIK, and finally, create a combined ranking by adding the positions from the two previous rankings.
Criterion three is to simulate the purchase of the 20 lowest-ranked stocks combined in a completely robotic manner. You will no longer be providing any kind of company evaluation. You'll simply check if it fits into the top 20 lowest-ranked stocks combined and invest in all of them with equal weightings, 5% of your capital in each.
So, if you have R$ 100,000 available to invest, you will put R$ 5,000 into each of these assets. Finally, we have criterion number four, where I considered that the portfolio was rebalanced every 3 months, always applying the same criteria as before. So, eliminate stocks with negative EV/EBIT, negative ROIK above 100%, liquidity of 500,000, and redo the ranking system so that every 3 months you rotate assets to always keep the stocks with the greatest upside potential.
And by conducting these tests within the Brazilian stock market between January 2013 and January 2026, I was able to verify that those who strictly applied the magic formula for a portfolio of 20 stocks... So you can see that it's no longer the same amount as the strategy in the American stock market.
Here in Brazil, 20 actions generated a greater result. Within that period, those who followed the magic formula achieved a total return of 809%, compared to the Ibovespa, which yielded only 166%. Converting this to annual returns, we find that the magic formula yielded 18.5% per year. Meanwhile, the Ibovespa yielded 7.8% annually.
So we see again a large disparity in strategy compared to the Ibovespa, both in the American stock market compared to the S&P 500 in dollars, and also here in Brazil. So, effectively, it's a strategy that follows principles that make sense, and that's why it continues to work to this day. Looking now at other data, the annual profitability table , that is, how much the Magic Formula and the Ibovespa yielded year by year, so from January 2013 to January 2014, January 2014 to January 2015.
And taking this complete period of 13 years, we have that the method managed to outperform the Ibovespa in seven of them. So, in most years, the method was the winner compared to the average. Over the entire 13-year period, profitability was positive in eight of them. So, the method showed losses in 2024, 2022, 2015, 2014, and also in 2013.
In the best of years, the strategy yielded 76.5. This happened in 2017, and in the worst year, the strategy fell by 23.6%, a fact that also occurred in 2015. And you can see from the profitability table that the Ibovespa index, for example, in its best year, which was 2016, yielded 51.8%. So the strategy managed to deliver a much higher return.
On the other hand, in the worst year, when the Ibovespa fell 18.7%, the method fell 23.6%. So we realize that in a bull market scenario, where the stock market rises significantly, the tendency is for the magic formula to rise even more. However, in a scenario of a very sharp drop, it is possible that the magic formula will fall more than the market average.
Of course, this didn't happen all the time, as you can see, for example, in 2021, while the Ibovespa fell almost 18%, the strategy yielded almost 16%. So it had a very large difference in return. Or for example, in 2013, when the Ibovespa fell 17%, the strategy only fell 2.1%. So it's clear that at certain times your portfolio strategy will fall more than the magic formula, but this didn't happen during every downturn, which also ends up being a very positive sign.
And the next piece of data is a simulation. If you had started investing back in 2013, you would have invested R$10,000 in the Ibovespa. In 2026 you would have R$600. With the magic formula strategy, you would have 90,900, meaning a much higher financial gain . The profit you would have made with that strategy, that magic formula here in Brazil, compared to the Ibovespa index, was 4.87 times greater.
This also takes into account a short period of 13 years. If you maintain this level of return difference of 18.5% per year versus 7.8% for 20, 25, or 30 years, you will have a much higher profit than 4.8 times the Ibovespa. You will have a profit 7, 8, 10 times greater than the market average if this pattern continues in the long term over the following years.
Now, moving away from theory and into practice, I'm going to present four stocks that are currently well-ranked in the strategy, among the top 20, considering the data from March 18, 2026. So, this data is very up-to-date. So, the first company I'm bringing to you is MILS, which occupies the 45th position in the ranking of the cheapest stocks, the 25th position in the ranking of the most profitable stocks, and adding 45 to 25, we have a combined ranking of 70, which makes MILS the 20th improvement in the strategy.
Regarding the next company, it's Porto Seguro, a very well-known company, even ranking 22nd in terms of price. In the profitability ranking, it's in 32nd place. Combining these figures, we have a combined ranking of 54, making it the 13th best stock in today's "magic formula" method. Next company, Metal Leve.
In the price ranking, it holds the 30th position, and in the profitability ranking, the 4th position. Therefore, its combined ranking is number 34, and when compared to other companies on the stock exchange, it is the ninth best. And finally, the best stock in this video is Wi Corporation. It ranks CCO in price, S in profitability, and has a combined ranking of number 12, making it the third best stock in the Magic Formula today.
So, it 's effectively a very functional strategy, one that has generated results well above average in the US stock market. So I'll put it back on the screen so you can see that information. So, $23.8 per year in dollars versus $9.6 per year in dollars compared to the S&P 500. And here in Brazil, it's a strategy that also managed to yield significantly above the Ibovespa, $18.5 per year versus $7.8 per year.
It's a very effective strategy. Of course, there are no guaranteed results, no guarantee that it will continue to outperform the market average by such a large margin, but it's a strategy that has worked for a long time and the trend is that it will continue to work because it makes logical sense. You will be investing in both inexpensive and profitable stocks.
By following this process, you will find actions in an objective way, just like I'm showing you in this video. Of course, none of these actions are recommendations; they are simply practical examples of how the strategy can be effectively applied. And if you want to delve even deeper into this world, following objective rules, investing your money, following a completely systematic process, I invite you again to register and gain access to the Valor Momento method e-book, which is precisely the same method I apply to my investment portfolio and which has given me a return well above the market average over the last five and a half years.
So that was today's video . If you enjoyed it, remember to like, subscribe to the channel, and turn on notifications so you'll be notified whenever a new video is uploaded here. And I'll leave another recommended video on the screen so you know what the next piece of content to watch is. I'm going to end the video here. Big hug and see you next time. M.
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