Magic Formula Investing
Magic formula investing refers to the investment technique outlined by a person called Joel Greenblatt. Magic formula investing has got its root in the principals of value investing. It offers market beating returns without the complexity associated with a discounted cash flow analysis .
The formula of magic formula investing involves the following steps. At first a minimum market capitalization should be established. Following that the company's earnings should be determined and the company's return on capital should be determined. After that all the chosen companies should be ranked according to its yield. Investment should be made in 20-30 highest ranked companies. Portfolio should be rebalanced once in a year. This process should be continued over a long period.
In short, it involves choosing the preferable market capitalization level and investing in thirty companies from magic formula investing and accumulating 2 to 3 positions once every month in a 12 month period.
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