Magic Formula Investing Review: A Revolutionary Approach To Stock Market Investing

Investing in the stock market can be a daunting task, especially for beginners. With so many variables to consider, it can be challenging to make informed decisions and earn a decent return on investment. This is where Magic Formula Investing comes in. Invented by Joel Greenblatt, a renowned investor and professor, this approach takes a unique approach that simplifies the stock market for investors.

What is Magic Formula Investing?

Magic Formula Investing is a process that involves buying stocks based on two factors: high earnings yield and high return on capital. The formula involves ranking stocks based on these two factors and investing in the top-ranked stocks. The idea behind this approach is to identify undervalued stocks that are likely to perform well in the future.

The earnings yield is the company’s earnings per share divided by the current market price per share. The return on capital is the company’s earnings before interest and taxes divided by its tangible capital employed. The formula ranks stocks based on the sum of these two factors, with the top-ranked stocks being the most undervalued.

How Does Magic Formula Investing Work?

Magic Formula Investing is a simple and straightforward approach that can be easily implemented by any investor. The first step is to identify a list of stocks that meet the criteria of high earnings yield and high return on capital. Once you have identified these stocks, you can rank them based on their combined score and invest in the top-ranked stocks.

One of the benefits of this approach is that it reduces the risk of investing in individual stocks. By investing in a diversified portfolio of top-ranked stocks, you can spread your risk and minimize your exposure to any single stock. This can help you earn a consistent return on investment over the long term.

Pros and Cons of Magic Formula Investing

Like any investment strategy, Magic Formula Investing has its pros and cons. Some of the advantages of this approach include:

• Simple and easy to understand
• Reduced risk through diversification
• Potential for high returns

However, there are also some disadvantages to consider, such as:

• Requires regular rebalancing of the portfolio
• Can be affected by market conditions
• Does not take into account qualitative factors

Conclusion

Magic Formula Investing is a revolutionary approach to stock market investing that can help investors earn consistent returns over the long term. By focusing on high earnings yield and high return on capital, this approach simplifies the stock market and reduces the risk of investing in individual stocks. While it does have its limitations, it is a valuable tool for any investor looking to make informed decisions and earn a decent return on investment.

People Also Ask

What is the Magic Formula Investing strategy?

The Magic Formula Investing strategy involves buying stocks based on two factors: high earnings yield and high return on capital. The formula ranks stocks based on the sum of these two factors, with the top-ranked stocks being the most undervalued. This approach simplifies the stock market and reduces the risk of investing in individual stocks.

Who invented Magic Formula Investing?

Magic Formula Investing was invented by Joel Greenblatt, a renowned investor and professor. He developed this approach based on his experience investing in the stock market and his belief in the value of simplicity and diversification.

Is Magic Formula Investing a good strategy?

Magic Formula Investing can be a good strategy for investors looking to earn consistent returns over the long term. By focusing on high earnings yield and high return on capital, this approach simplifies the stock market and reduces the risk of investing in individual stocks. However, like any investment strategy, it has its limitations and may not be suitable for all investors.