Magic Formula investing is a stock picking strategy created by Joel Greenblatt that is used to identify good companies at cheap prices.
Over the period from 1988 to 2004, the strategy has returned 33% per year! In the same time period, the S&P 500 returned 14% per year, which is still a great return.
To find good companies, you use a metric called "Return on Capital" and to find cheap companies, you use a metric called "Earnings Yield." The goal is to rank all the companies in by these two metrics separately, add the two rankings together, and pick from the top 30 stocks that have the lowest combined number. You can use his website to easily screen for companies that meet the magic formula criteria. Link below.
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Over the past few years, this strategy has underperformed the market, but in his book, Greenblatt explains that it's natural for a strategy to have low or high periods, but he is insistent that his strategy will beat the market over a longer time period.
You can purchase Joel Greenblatt's book, The Little Book That Still Beats The Market below. I receive a small commission of each book purchased through this link.
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