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Magic Formula Investing is Simple
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Magic Formula Investing 2.0 2.0
Author:
Supported languages: English
Supported OS: Win95 / Win98 / Windows2000 / WinXP
Price: Free
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Magic Formula Investing
The Little Book That Beats The Market, by Joel Greenblatt, was a milestone book in value investing. In a short 155 pages that can be read in 2 hours and understood by anyone, Mr. Greenblatt concisely lays out a simple investment strategy where stocks are picked by only 2 factors: pre-tax return on tangible capital (ROTC), and earnings yield. A high ROTC is a sign of a good company. A high earnings yield is a sign of a cheap stock. The "Magic Formula" simply ranks all U.S. stocks by both metrics, adds them together, and buys the highest ranked stocks.
Simple, right? And to simplify things even more, Mr. Greenblatt advises to buy 5-7 stocks every few months, holding them for a year and then selling, replacing with new picks. He even created a website, www.magicformulainvesting.com, that lists all the current stocks by his rankings.
It couldn't be more simple. But look at the returns! From a 17 year period starting in 1988, following this "Magic Formula" produced 30.8% annual investment returns vs. 12.4% annually for the market at large. These unbelievable results would turn an initial investment of $15,000 into over 1.4 MILLION DOLLARS in just 17 years!
What's The Catch?
A 30% annual investment return is almost unbelievable. Even Warren Buffett's legendary Berkshire Hathaway hasn't approached such lofty returns. However, when Magic Formula Investing (MFI) is applied in practice, some kinks in the armor appear.
Specifically, the Magic Formula tends to turn up some stinkers along with the flowers. Fad stocks pop up after the fad has run its course. Consider the case of Crocs (CROX), a Magic Formula stock in early 2008 at $21, which subsequently dropped 94% over the next 12 months. Or Heely's (HLYS), which in the same period fell from $4.50 to $1.50, a 73% decline.
It also does not guard you against firms with looming financial issues that could threaten viability. Idearc (IAR), a phone book publisher, was on the MFI screen in early 2008 at about $10
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Free Magic Formula Investing 2.0 download - 1.31 MbMagic Formula Investing_v2.0.exe
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| Keywords:
Magic Formula Investing, small cap investing, canadian small cap stocks, small cap mutual funds, stock advice, list of penny stocks, best penny stocks |
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