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==Methodology== |
==Methodology== |
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Greenblatt suggests purchasing 30 "good companies": cheap stocks with a high [[earnings yield]] and a high [[return on capital]]. He touts the success of his magic formula in his book 'The Little Book that Beats the Market' |
Greenblatt suggests purchasing 30 "good companies": cheap stocks with a high [[earnings yield]] and a high [[return on capital]]. He touts the success of his magic formula in his book 'The Little Book that Beats the Market' ({{ISBN|0-471-73306-7}}), claiming that it does in fact beat the [[S&P 500]] 96% of the time, and has averaged a 17-year annual return of 30.8%<ref>Zen, Brian and Hamai, Garrett. "[http://www.gurufocus.com/news.php?id=802 Joel Greenblatt Speaking at NYSSA]". December 28, 2005.</ref> |
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===Formula=== |
===Formula=== |
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Revision as of 07:01, 25 November 2018
Magic formula investing is an investment technique outlined by Joel Greenblatt that uses the principles of value investing.
Methodology
Greenblatt suggests purchasing 30 "good companies": cheap stocks with a high earnings yield and a high return on capital. He touts the success of his magic formula in his book 'The Little Book that Beats the Market' (ISBN 0-471-73306-7), claiming that it does in fact beat the S&P 500 96% of the time, and has averaged a 17-year annual return of 30.8%[1]
Formula
- Establish a minimum market capitalization (usually greater than $50 million).
- Exclude utility and financial stocks.
- Exclude foreign companies (American Depositary Receipts).
- Determine company's earnings yield = EBIT / enterprise value.
- Determine company's return on capital = EBIT / (net fixed assets + working capital).
- Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
- Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
- Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
- Continue over a long-term (5–10+ year) period.
See also
References
- ^ Zen, Brian and Hamai, Garrett. "Joel Greenblatt Speaking at NYSSA". December 28, 2005.