A 2022 study of the stock market in Norway found that the magic formula generates risk-adjusted excess returns. Over the sample period (2003-2022) the strategy had a CAGR of 21.56%. However, these returns may not be achievable in real-world conditions due to the impact of transaction costs.
The Magic Formula combines these two ideas into a system that has worked for years—and in markets all around the world. It does this by looking for companies with a high earnings yield (companies that are undervalued) and a high return on invested capital (ROIC) (quality companies).
Sell each stock after holding it for one year.
For taxable accounts, sell stocks with a gain after holding them for a few days more than a year and sell the ones with a loss after holding them for a few days less than a year. Then replace those stocks with the new ones identified by the formula.
What Is the Magic Investing Formula? Screening stocks using the magic formula method is based on a rankings system. As developed by Greenblatt, this system uses three distinct criteria to rank companies: earnings before interest and taxes (EBIT), earnings per share, and return on capital.
Joel Greenblatt's magic formula for investing works on two principles – the current price of a stock and the parent company's net operational costs. It suggests you invest in the stocks of companies with extraordinary return on capital employed (ROCE) or high earnings yield.
What is the 7% Rule? The 7% rule in retirement refers to a strategy where retirees withdraw 7% of their retirement savings annually to fund their retirement lifestyle. This approach aims to balance providing sufficient income while preserving the principal for as long as possible.
Requirements for Magic Formula Investing
Since Greenblatt's magic formula only applies to companies with market capitalizations greater than $50 million, it excludes small-cap stocks. The remainder will all be large companies but excludes financial companies, utility companies, and non-U.S. companies.
Warren Buffett and his mentor, Ben Graham, championed Rule #1 for one fundamental reason: minimizing loss. By minimizing losses, even in subpar investments, you increase your chances of finding winning investments over time.
A coffee can portfolio is a long-term bet on certain stocks that have extremely good promoter lineage, have consistently performed over the years, have a long runway for growth and are backed by good management to name a few.
Stockopedia explains Magic Formula Score
An overall ranking for each stock is created by combining the rank of a company's Return on Capital vs the market (its quality) with the rank of its Earnings Yield (its cheapness).
In Joel Greenblatt's current portfolio as of 2024-09-30, the top 5 holdings are SPDR S&P 500 ETF Trust (SPY), Gotham Enhanced 500 ETF (GSPY), NVIDIA Corp (NVDA), iShares Core S&P 500 ETF (IVV), Apple Inc (AAPL), not including call and put options. Joel Greenblatt did not buy any new stocks in the current portfolio.
This is how the two Magic Formula investing ratios are calculated: Return on invested capital (ROIC) = EBIT / (net working capital + net fixed assets). Earnings yield = EBIT / Enterprise value.
The earnings yield is a financial ratio that describes the relationship of a company's LTM earnings per share to the company's stock price per share. The earnings yield is the inverse ratio to the price-to-earnings (P/E) ratio. The quick formula for Earnings Yield is E/P, earnings divided by price.
What Is the 1% Rule in Trading? The 1% rule demands that traders never risk more than 1% of their total account value on a single trade.
Warren Buffett, one of the world's most successful investors, has shared plenty of advice over his long career. But one piece of advice stands out as his top rule: “The first rule of investment is don't lose money.” And if you ask about the second rule?
Large-cap: Market value of $10 billion or more; generally mature, well-known companies within established industries. Midcap: Market value between $3 billion and $10 billion; typically established companies within industries experiencing or expected to experience rapid growth.
The magic formula investing strategy is based on a simple principle: buy good companies at good prices. It uses two key financial metrics to identify these companies: return on capital (ROC) and earnings yield (EY).
Try Flipping Things
Another way to double your $2,000 in 24 hours is by flipping items. This method involves buying items at a lower price and selling them for a profit. You can start by looking for items that are in high demand or have a high resale value. One popular option is to start a retail arbitrage business.
To answer the question of how to double my money quickly, simply invest in a portfolio of investment options like ULIPs, mutual funds, stocks, real estate, corporate bonds, Gold ETFs, National Savings Certificate, and tax-free bonds, to name a few.
Maintain your current lifestyle in retirement
For most people, having around 70% of their current take-home pay, is the amount of money they need in retirement to keep the lifestyle they have now. To work out how much you might need, this is a good place to start.