Posted by kcchongnz > 2013-06-18 17:50 | Report Abuse

In his The Little Book that Beats the Market, Joel Greenblatt describes a Magic Formula to beat the market. His magic formula is basically “a long-term investment strategy designed to buy a group of above-average companies but only when they are available at below-average prices”. I have read the book. Everything in the book is very easy to understand. The concept is simple, the explanation is simple, but most important of all, the execution for investors is simple enough to do on their own. For more detail explanation of the Magic Formula of Greenblatt, refer to the link below: http://en.wikipedia.org/wiki/Magic_formula_investing So how well the Magic Formula worked? The table below shows that the Magic Formula outperformed the S&P500 by a wide margin for the 22 years from 1988 to 2009. The Maigc formula outperformed S&P 17 out of the 22 years and achieved a CAGR of 23.8% as compared to the 9.6% of S&P. $10000 invested 22 years ago in 1988 has grown to 1.09m by the end of 2009, even after the US sublime crisis in 2008-2009. This is by no means a small feat. What is the secrete? The key driving formulas used by Greenblatt for his Magic Formula are: • Earnings Yield = EBIT / Enterprise Value • Return on Capital = EBIT / (Fixed Assets + Net Working Capital) As you can see the principle behind the Magic Formula is to buy good companies (high return of capital) with below-average price (low EV/Ebit, or high Ebit/EV). So are you interested to get rich? Can we make use of this Magic Formula to scout for stocks in Bursa for our investing strategy? Let us get started, shall we?