This is the investment system described in "The little book that beats the market" by Joel Greenblatt
Joel is probably a well known investor with the best track record in investing in the stock market. People like Buffett are better know because Joels record extended for just over a decade, after that he close the fund.
its a very simple sistem where you take 2 variables, 1) high return (and rank it from 1 to X) and how cheap they are (rank it from 1 to X) then add the scores. and thats it! the best ranking stock (the ones that have lower scores are good companies and low prices)
is to create a system that would trade life in a robust plarform for decades and show those results with real money, becuase right now as I write this, there no where to find an account that would share live results with this. so people always wonder does it work? The great thing about the magic formula is that a lot of investor could use it without stepping on eachother toes. since depends when you start, you would buy different stock that day, and change them every year.
from: https://www.oldschoolvalue.com/stock-screener/magic-formula-screen.php
The Magic Formula screener methodolgy he outlined is as follows:
1. Establish a minimum market capitalization (usually greater than $50 million)
2. Exclude utility and financial stocks
3. Exclude foreign companies (American Depositary Receipts)
4. Determine company’s earnings yield = EBIT / enterprise value
5. Determine company’s return on capital = ebit / (net fixed assets + working capital)
6. Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages)
7. Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period
8. Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark
9. Continue over a long-term (3–5+ year) period
10. The two key points of the Magic Formula stock screen is based on:
notes:
Earnings Yield = EBIT / Enterprise Value
Return on Capital = EBIT / (Net Fixed Assets + Working Capital)
To get the full performance details from 1988 read the link below.
Read more: Does the Magic Formula Screen work?
chose the number of stocks that you want to diversify (minimun 20), suggested: 30 or 50. (more than that and it wouldnt make much sence to invest on your own but to buy the S&P instead.
1st funciton :
Use the Stock Screener to select the top-rated stocks from the S&P CompuStat database. min Market cap of 50 million. Exclude utility and financial stocks. Exclude foreign companies (American Depositary Receipts)
example: instead of taking a minimun market cap of Million, and you choose
2nd funciton: Determine company’s earnings yield = EBIT / enterprise value Determine company’s return on capital = ebit / (net fixed assets + working capital) Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages)
3rd function:
Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period
Use a cost effective way to purchase the stocks. If the amount you are investing represents a large percentage of your long-term investment portfolio, you may want to consider making multiple portfolio purchases over a 12 month period.
4th function:: sell winners after a year has passed, sell losers before the first year has passed. 5th function:: Once you have sold any gains and any losses, select and purchase a new portfolio of screened stocks. (back to function 1)
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