Opinion On Magic Formula Investing

The 'capital' part of the equation includes fixed assets as well as working capital.. While his formula is straightforward, it doesn't eliminate psychological barriers to investing success—that is, investors running for the hills when returns dip.. In his 2005 bestseller, The Little Book That Beats the Market, Greenblatt offered readers a way to outperform using a 'Magic Formula' of only two variables—return-on-capital and earnings yield—to identify good companies selling for bargain prices.

Using this strategy, Greenblat's back-tested strategy showed returns of more than 30% annually from 1988 through 2004 (more than double those of the S&P 500 during that period) and, since 2006, our quarterly rebalanced, ten-stock Greenblatt-based model portfolio on Validea has returned 7.. Using our Greenblatt-inspired stock screening model we've identified the top ten Magic Formula picks :CompanyTickerIndustryMkt Cap (Mil)Chicago Bridge & Iron Company N.

The performance of the strategy has cooled since the end of 2013, as you can see by the chart, but as Greenblatt has noted in his research and in interviews, active and focused value strategies, like this one, can go through multi-year periods of underperformance but sticking to the strategy through the difficult periods is key to achieving the long-term returns this type of approach has the potential to produce.. The mastermind behind the simple and effective magic formula, holder of one of the best 10 year investment records at 40-50% CAGR.

It is calculated by dividing earnings-per-share by current share price (essentially the inverse of the price-earnings ratio).. Greenblatt believes, therefore, that if subscribers to his formula truly understand why it makes sense, they stand a greater chance of sticking with it and reaping the benefits.. You're taking your cow to market You're supposed to get some cash to help get your family through winter.. You know how the rest of this story goes: investment in bean stalk futures and greenmail.

However, you meet a strange little man who offers to trade the cow for a magic formula for investing.. The second variable, earnings yield, shows how much a business earns relative to its stock price.. A breakdown of the performance of the Magic Formula compared to my own variation.. 1% annually compared to the S&P 500's return of 5 0% over that same timeframe.. Words of wisdom from Greenblatt on investing and producing alpha Resources to Greenblatt to help you improve as an investor.. This measures how much of a return you could expect to get if you were to buy the whole business.. It is calculated by dividing earnings before interest and taxes (EBIT) by the sum of fixed assets and working capital. 5ebbf469cd

5ebbf469cd