Sunday, December 24, 2006

Magic Formula Investing

This is the accompanying web site based tool for much acclaimed book -"The little book that beats the market".

Good book and a simple web based tool showing the results of the calculations and formula described in the book.

I have not been a big fan of get-rich-quick formulas to buy and sell stocks. But, once you carefully read this book, a lot of what is said in the book is based on solid fundamental analysis which takes you closer to valuing the company well. It is no brainer that if you can value the company reasonably well, buy the stock when it is trading well below the value and time your trades well, you are going to be better off the market. Thus this book puts basic value investing to good practice.

The author, a well acclaimed professor of finance, has gone ahead and made available the tool at absolutely free of cost. Certainly deserves some praise here. Interesting thing is that the list of stock recommendations generated by the tool are pretty neat. Most of them are trading well below P/E of 15 which should be one of the criteria to base your trading on. That way you do not end up paying more than a reasonable price. The formula also takes into account other things such as return on capital etc. to make it a more sound investment.

5 stars.

Even if you do not want to use the formula and practice as recommended by the book, you can use the tool to eliminate many companies which would have taken substantial time if you were to do the research using other means.


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1 comment:

Hendrik Oude Nijhuis said...

Personally I agree on you that the ‘formula’ is a good screen, to START the selection process.

The results this year of the random selections are not that exiting. I believe this will continue in the coming years. This because of the –unexpected- rise in commodity prices over the last years.

By this many commodity companies have high returns on invested capital and high earnings yield, which make them to appear on the Greenblatt-screening, although they lack durable competitive advantages. As a starter for further research, I recommend screening on ROC and EY (like Greenblatt) and I also advice to read his book, The little book that beats the market.

Success in investing,
Hendrik Oude Nijhuis