Thursday, June 08, 2006


Joel Greenblatt's Magic Formual Investing

This site can help calculate the return on capital and earnings yield for hundreds of stocks.

The website asks you what size of companies you're interested in buying, then it asks you how many stocks you want — 25, 50 or 100. You click on "go" and the site gives you a list of U.S. companies that meet your criteria. You just buy five to seven stocks recommended by the site every few months and turn them over after holding on to them for a year.

Can the Magic Formula be risky? Sure, in the short-term. But over the long term, no, it's not risky. The basic idea is buying good companies for cheap prices. "Good" as in a high return on capital, and "Cheap" as in high earnings compared to the priced paid for it (The earnings yield, or the inverse of the price-to-equity ratio [P/E]. Better to pay $100 for a company that earns $10, than to pay $100 for a company that earns $1).


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