Magic Formula Investing

What is Magic Formula Investing?

Magic formula Investing meaning can be defined as the rule-based and effective investment strategy that helps people learn an easy and effective technique for Value investing. The strategy focuses on the past performance of the companies and stocks to rank different stocks. In other words, magic formula investment give stocks and companies an accurate rank according to the price as well as returns on investments.

It gives investors a clear understanding of how they can practice value investing without letting their emotions affect investment decisions. Magic Formula Investing teaches investors to follow a practical trading approach, in which, all the factors affecting the price of the stocks and the Capital returns are taken into consideration. This value investing formula was introduced by a professional inventory and a professor “Joel Greenblatt”. Note that the magic formula investing is not applicable to the small capital companies.

How does the Magic Formula Investing Work?

People discovered this formula in the “The Little Book that Beats the Market” launched by the hedge fund manager and the developer of the formula. He completed his graduation from Wharton School and works as a professor at Columbia University. He has mentioned the two important factors every investor must keep in mind when researching the stocks of a company. They include the price of the stock and the company’s capital. It doesn’t involve a lot of technical research and analysis. All that the investor got to do is use the stock screener tool launched by Greenblatt to research the top 10-20 companies that are dominating the market. They can choose the stock and company based on the company’s rankings and their performance over the past few years.

Here, the return of capital refers to the profits the companies make from their assets. Magic Formula Investing is quite straightforward. It says that the investor must not hold the losing stock for more than a year. You should rather have the losing stocks sold before you reach the one-year mark in order to leverage the income tax benefits. It enables users to use their loss to counterbalance the profits.

The winning stocks, on the other hand, are to be held for more than a year. The Income tax provision reduces the total tax you are supposed to pay on the long-term gains. If you hold the winning stock for more than a year, the profit you will make from its sale will be counted as the long-term Capital Gain. Hence, it will be subject to lower Taxes. The main purpose of this investing formula is to enable investors to buy shares from reputable and successful companies at an average price. The screening tool presents the list of companies that are performing the best from the value investing viewpoint.

The unemotional approach for investment can help you succeed in this Industry in the long run. It will also make it easier for you to manage your investment Portfolio. Note that the formula is applicable to companies with a capital of over millions.