The Magic Formula Approach to Stockpicking
This is an interesting investment approach that was originated by Joel Greenblatt, author of, The Little Book That Beats The Market.
The philosophy behind this approach is for the person to invest in above-average companies (those with high return on capital) when they can be purchased at below-average prices (high earnings yield). Companies with a high return on capital are desirable because they are profitable, and can have the ability to grow with a high return on investment and expand earnings at a high level of growth.
Short-term market distortions often allow investors to buy a good company when its earnings yield is high (earnings divided by price) and sell as the market correctly prices the company over the long term.
The Magic Formula excludes micro-caps, foreign companies, utilities, and financial stocks, and uses the 3,500 largest companies available for trading in the U.S..
You can find out more about this investment approach by clicking on "Magic Formula Investing" in our "Links" section.
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The philosophy behind this approach is for the person to invest in above-average companies (those with high return on capital) when they can be purchased at below-average prices (high earnings yield). Companies with a high return on capital are desirable because they are profitable, and can have the ability to grow with a high return on investment and expand earnings at a high level of growth.
Short-term market distortions often allow investors to buy a good company when its earnings yield is high (earnings divided by price) and sell as the market correctly prices the company over the long term.
The Magic Formula excludes micro-caps, foreign companies, utilities, and financial stocks, and uses the 3,500 largest companies available for trading in the U.S..
You can find out more about this investment approach by clicking on "Magic Formula Investing" in our "Links" section.
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posted by Bob Moser at
2:51 PM
1 Comments:
Personally I think Greenblatt’s screen is a fine START. I believe it’s important to do further research. The results this year of the random selections are not that exiting. I believe this will continue in the coming years. This because of the –unexpected- rise in commodity prices over the last years.
By this many commodity companies have high returns on invested capital and high earnings yield, which make them to appear on the Greenblatt-screening, although they lack durable competitive advantages. As a starter for further research, I recommend screening on ROC and EY (like Greenblatt) and I also advice to read his book, The little book that beats the market.
Success in investing,
Hendrik Oude Nijhuis
www.magicformulastocks.com
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Anonymous, at 9:17 AM
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