Too Good To Be True?

What if I told you I knew of a stock-picking system that could turn $11,000 into over $1 million?

What if I told you picking those stocks would take about 32 seconds?

What if I told you that trading-for-a-living using this system would only have you working one day per year?

And what if I told you that it averaged over 30% per year over a period of 17 years, almost tripling what the stock market did in the same period of time?

Would you say it's too good to be true?

I wouldn't blame you if you did. I probably would, too.

Somewhere along the line, someone decided that too-good-to-be-true was a great way to take people's money. Offer something apparently awesome, convince them that it's awesome (even when it's not), and then watch the money roll in.

Somewhere along the line, a lot of people got wise to this.

And somewhere along the line, we learned to throw out anything that sounds like it might be an effortlessly great opportunity.

Action. Reaction.

But what happens when it's actually not too-good-to-be-true? What happens if it's really good AND true? Does that opportunity just slip away?

Looking back on my life, I realized that for twenty years I sold something that appeared to be too good to be true.

I told all of my students that:

  1. If they showed up every day.
  2. And followed the fundamentals I showed them.
  3. Their ranking would go up--guaranteed.

In retrospect, that sounds like a scam.

Junior tennis is a melting pot of evil USTA overlords, crazed parents, disinterested coaches, bratty kids and a lot of really great people. Given all that, it seems ludicrous to "guarantee" that a kid's ranking would go up. There were too many variables, too many things that could go wrong.

Yet that's what I did.

And guess what? I was right 100% of the time.

I never had a kid who followed those guidelines and didn't dramatically improve his/her ranking. In fact, I once had a kid leave my program because he felt like he needed something better.

That kid, probably my biggest failure, had seen his ranking rise 86 spots from the day he started until the day he left. Even then, the guarantee had worked.

In short, I had watched a promise that was too-good-to-be-true betrue for over twenty years.

Which brings us back to my stock system from above.

$11k to a million in 17 years working for 30 seconds one day per year? Ridiculous.


The system we're talking about is from The Little Book That Still Beats the Market. It's a value investing system (called "Magic Formula") that is just as easy as I describe. The author, Joel Greenblatt, has a website you can go to, run a screen in one second, and all you have to do is:

  1. Buy shares in the 30 stocks that come up.
  2. Hold them for one year and one day.
  3. Do it again next year.
  4. That's it.

Just doing that gives you the aforementioned returns. That's what the research shows.

So I'll pause a second and wait for your obvious question. I know it's coming. Just please don't yell.


I asked you not to shout.


My ears are bleeding.

Here's the thing: the Magic Formula system loses.

For at least 5 months every year, the Magic Formula performs worse than the market. What's more, the Magic Formula system can be negative for a whole year. Sometimes it's negative for two years. Sometimes, it can even do worse than the market for as long as three years!


On one hand, the system kills the market and is super easy to trade. On the other hand, it loses for long stretches of time.

Over 17 years, it is definitely too-good-to-be-true, but for isolated stretches, it's not good at all.

So which is it?

I think maybe it's both. And that's the real trick.

Even things that are amazing to the point of disbelief have downsides.

It's true that the Magic Formula research guarantees that a trader will be wildly successful over a period of two decades, but within those two decades will be times it doesn't work at all.

It's also true that I guaranteed ranking improvement over time, but within that period of time my students lost matches.

Even too-good-to-be-true fails miserably from time to time.

And that's the good part. If something fails, you know it will succeed in the long run.


For example, Bernie Madoff never failed to deliver perfectly consistent returns. That too-good-to-be-true performance turned out to be a scam-- because it never failed.

A system that never loses isn't real. A coach that promises no heartbreak is a liar.

The truth is: if we really want to reap the incredible benefits of something that seems too good to be true, we have to experience things that don't seem good at all.

If we can do that, fantastic things are possible. The Magic Formula system shows us that.

I wonder if daytrading robots like The Heron are too good to be true? We'll discuss that (and more) tomorrow.

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