Magic formula investing is an effective investment method outlined by Joel Greenblatt. This technique helps to make good money within short investment period. This investment became more popular in 2009 because of its unique features and procedures. There are certain facts that need to be considered before investing in magic formula investment program.
First, all the credit card debts need to be cleared before starting this program. Higher interest rates debts and auto loan should be cleared. This formula helps to get the benefit of constant return from the investment and all the procedures are mostly based on value investment techniques. Also, this investment plan is well enhanced with different trading amounts.
Second, before implementing this program, if a person wishes to fund their account, then they should create an emergency account themselves. This emergency cash funds are very helpful during unpredictable expenses such as auto repairs or medical expenses. Also, emergency account serves as a great tool to evaluate the monthly expenses.
This formula depends on many important components, but building and maintaining the right investment portfolio is the critical component. The steps for building the right portfolio are choosing stocks with minimum market capitalization of about $50 million or more, exclude stocks of financial and utility companies, and exclude stocks of foreign organizations.
Selecting the right stocks with minimal market capitalization can be easily achieved by following few steps. First, company’s annual earnings yield and return on invested capital need to be determined. The stocks should be chosen by ranking them to find stocks that are above market capitalization threshold. The ranking can be done based on return on capital and earning yields per year.
Then, one can invest in stocks that are in 20 to 30 rankings in the list. In addition, the stock’s performance should be analyzed in twelve months time-frame. The highest performing stocks start accumulating 2 to 3 positions monthly in a year. Every year the portfolio require re-balancing and this include selling poor performing stocks and sometimes even high performing stocks.
Poor performance stock need to be sold before one week of the one year mark and the high performance stocks can be sold after one week from the one year mark. By systematically following these methods for about 3 to 5 years, one could easily enjoy the benefit from this investment technique. This investing method is the best turnover strategy and it is very simple to understand. This strategy is totally logical, simple, straightforward, and gives exceptional out-performance.