Magic Formula Investing Wednesday, August 22, 2007
Posted by ei-forum in Investing, US Traded Stocks.trackback
In ‘The Little Book That Beats the Market’ (read our review: here), Greenblatt highlights his method for selecting stocks and beating the market. Does the system work? Well, over the past 20 years he has managed to generate annualized returns of 40%… we think that this is enough to convince even the skeptics to read on.
His thesis is quite simple: instead of following the analysts or buying an index, investors should aim to buy good businesses when they are cheap and will therefore generate superior results in the coming 12 months. How do we find these businesses? Actually, Greeblatt has made it quite simple by constructing a website that will run the query for you (www.magicformulainvesting.com), all you have to do is decide the minimum market cap and number of stock you want the search to show. The formula automatically selects stocks based on their return on invested capital (we want a high number) and P/E ratio (we want a low number).
In this current market situation, we thought that it would be an ideal time to use this formula to give us some interesting investment ideas. We encourage you to do the same. Happy screening!
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The problem with this magic formula is that it does not prevent you from selecting losers. It’s a pure statistic method which, as far as we are concerned, is open to further improvement.
Determining which stocks are undervalued or which are justly beaten up, is a very difficult task, which we believe is best executed by people who know the company very well, the insiders. Therefore, we track the insider tradings of the companies in the Top 25 list of the Magic Formula, and publish them on a regular base on this site
http://magicformulainsidetraders.blogspot.com/
What’s even more important about inside tradings is that when executives bought shares in their own companies, the stock tended to outperform the total market by 8.9% over the next 12 months. Conversely when they sold shares, the stock underperformed the market by 5.4% (Nejat Seyhun, a renowned professor and researcher in the field of insider trading at the University of Michigan).
[...] by Joel Greenblatt. I’ve started on the portfolio and so far it’s up 4% for the month. Magic Formula Investing ซ Enterprising Investor Forum Aug 22, 2007 … The problem with this magic formula is that it does not prevent you from [...]
I think that there could be some good investment opportunities out there, but I’m still a believer in doing as much research about a company as I can on my own, and not following someone else’s trends.
The volatility of the market is still an issue, but hopefully we’ll see the bottom soon and the recovery will be in sight. I’m thinking maybe by second quarter of ’09, though this might be just optimistic.
Sounds like an educated guess but who know? We hear consensus around end 2009 / Q1 2010…. but we still feel it is too early to really understand the real impact of the current situation….
Hi,
We have made a screener for European companies, screened with the ‘Joel Greenblatt Magic Formula investing’ method.
For the moment we have 3 regions available ( Euro, UK , USA)
Just vist our website to obtain more information.
http://www.value-investing.eu
regards,
Philip