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The Primary of Magic Formula Investing

In 2009, Joel Greenblatt published The Little Book That Beats the Market in which he describes in detail Magic Formula Investing, a method that has gained a lot of attention since then. Greenblatt’s formula is claimed to beat the S&P 500 96% of the time, and produces a 17-year average annual return of about 31%.

Greenblatt’s formula involves several critical elements, but the concept involves building the right investment portfolio, and maintaining that portfolio over a long period of time. By following the components of the Magic Formula Investment, you will be able to build the right portfolio.

The basic steps to building your portfolio are:

* Select stocks with a market capitalization of at least $50 million or greater.

* Eliminate financial and utility companies.

* Eliminate foreign subsidiary companies.

Choosing the right stocks that meet the minimum market capitalization can be achieved by following a few more steps. First you need to determine the company’s annual revenue generation. You also need to know the company’s return on capital.

You will select your stocks by ranking all those on the market capitalization threshold, taking into account those with the highest earnings and return on capital. You may not be able to invest in stocks that are in the top 5 or 10 of this system’s results; However, you should invest in stocks that are in the top 20 to 30 to take advantage of the Magic Formula.

In addition, there are some other steps that should be included in your investment methods in order to apply the Greenblatt formula. You will want to track the performance of your stocks over a twelve month period. Top recruiters will accumulate 2 to 3 positions per month within a year.

Every year you will need to rebalance your portfolio, which can include selling poor performing stocks as well as strong performing stocks. Those that have underperformed in the past few months should be sold a week before the one-year ownership mark. Those that have performed well should be sold a week after that mark.

By following these methods over 3 to 5 years, you will follow Greenblatt’s Magic Formula of Investing.

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