Not long ago, the great Warren Buffett said in an interview that "investing is simple, but it's not easy". If that sounds confusing, all you need to do is look at the investing style of Joel Greenblatt to understand exactly what Buffett means.

Back in 2005, Greenblatt, a successful hedge fund manager, published The Little Book that Beats the Market, a small, concise book that shows how investors can produce market-beating returns using a formula that has two -- and only two -- variables.

In an investing world of seemingly limitless data points, that may sound improbable. But it's not. Greenblatt's "magic formula", as he called it, produced back-tested returns of 30.8% per year from 1988 through 2004, more than doubling the S&P 500's 12.4% return during that time. What's more, a 10-stock portfolio picked using my Greenblatt-inspired Guru Strategy computer model has averaged an annual return of 9.3 in the four years since its inception -- while the S&P 500 has been losing 3.9 per year. Last year alone, the portfolio was up 63.1%.

How does the Greenblatt approach work? On a broad level, it's based on a very simple, sensible, Buffett-esque notion of Greenblatt's: "Buying good companies at bargain prices makes sense."

To identify "good companies", Greenblatt uses the first variable of his "magic formula": return on capital. Essentially, ROC is a way to see how much money a company is making by using its assets. The higher the ROC, the better job the company is doing in terms of making profits.

Return on capital is similar, but not identical, to the return on assets rate that Buffett and other gurus like Peter Lynch use. Rather than using a company's reported earnings, as is done when calculating ROA, however, Greenblatt (and the model I base on his writings) uses earnings before interest and taxes ( EBIT ), so that debt payments and taxes don't obscure how well the firm's actual operating business is doing. And instead of dividing that by total assets, as ROA does, he divides it by "tangible capital employed," which is equal to net working capital plus net fixed assets. "The idea here," he writes, "was to figure out how much capital is actually needed to conduct the company's business."

The second part of the Greenblatt approach is finding those good stocks when they are selling at "bargain prices". To do so, Greenblatt (and my model) uses earnings yield. Typically, earnings yield is calculated by dividing a company's trailing 12-month earnings per share by its current price per share -- essentially the inverse of the price/earnings ratio. But Greenblatt also makes some slight adjustments here, so my model does the same. Rather than earnings, EBIT is used, and rather than price, "enterprise value" is used. Enterprise value includes not only the price of the company's shares, but also the amount of debt it uses to generate earnings.

My Greenblatt-inspired model ranks all stocks in earnings yield and return on total capital, and then adds the rankings together to get the stock's final ranking. The ten stocks with the best combined rankings make it into my Greenblatt-based portfolio.

Simple? Yes. Easy? No.

Sounds easy, right? Not really -- remember what Buffett says about "easy" and "simple" being two different things.

The difficulty of the Greenblatt approach comes not in the logistics or specifics, but instead with mindset. That's because while the strategy has been proven to work very well over the long term, it doesn't work all the time. In fact, the magic formula has had periods of two or even three years when it has lagged the market, Greenblatt notes -- not unlike just about any good strategy. When that happens, he says, most investors bail, jumping on the latest "hot" stocks or strategies -- which usually lands them overpriced duds.

Their abandonment of the magic formula approach is, however, what allows you to buy at bargain prices the strong stocks that the strategy targets -- if, that is, you have the intestinal fortitude to stick with the strategy through the short-term pain. That's the hard part. If you do, you should reap the rewards when Wall Street realizes it's overlooked these strong companies. Knowing all of this -- and in particular knowing that you can't predict when those down periods and bounce-backs will come -- Greenblatt says it's absolutely critical to stick with the strategy through the rough times. In the end, his approach, like Buffett's, is really based on common sense and discipline -- not magic.

Right now, my Greenblatt-based approach is finding a number of attractive bargains. Here are three that currently rank high on its list:

Amedisys, Inc. ( AMED ): This Baton Rouge-based home health care and hospice services provider ($670 million market cap) ranks as the third-best stock in the market, according to my Greenblatt approach. It has a strong earnings yield of 16.6% (which ranks #47 of all stocks the market) and an even-better 282.2% return on total capital (which ranks #9).

Chicago Bridge and Iron Company N.V. ( CBI ): Coming in at #2, this $1.8 billion market cap firm was founded more than a century ago in Chicago as a bridge designer and builder. Today, it's based in The Netherlands, and is involved in engineering, procurement and construction services for customers in the energy and natural resource industries. And it does that quite well, currently posting a 17.5% earnings yield (#37 in the market) and whopping 346.6% return on total capital (#6).

AmSurg Corp ( AMSG ): With an earnings yield of 25.5% (#6 in the market) and a return on total capital of 116.5% (#21), this Nashville-based ambulatory surgery center owner/operator is the most attractive stock in

At the time of publication, John Reese was long ARO, IMO, and MTD.