Magic Investing Formula

Have you ever wondered if there is a secret magic investing formula using which you can always gain in the stock market?

In this little book, Joel Greenblatt gives us the magic investing formula which not only provides consistent gains, it also provides higher gains than any other system! As Andrew Tobias puts it in his foreword to this book: most people even won't believe it.

The concepts in this book are extremely simple and based on common sense. Infact if you are looking for a sophisticated investment strategy, this book is not for you.

Joel convinces us in the beginning itself that if we have to beat the market, we can not depend on investment consultants but rather we should do it ourselves. In this DIY book, Joel starts with the basic understanding of the stock market, why stocks are better than other conventional investments, how the stock market works and why it is normally difficult to win in the stock market. This sets the basic foundation for magic investing formula.

Now comes the common sense part. Consider the following points from Joel:
- Keeping aside risk, if your investment in stock market does not give more than bank interest(say 6-8%), you are actually loosing on your money and it is not worth investing in stocks.
- Stock prices fluctuate for various reasons. Now buying a stock when it is low, at a bargain price is a good thing.
- If there are two companies of the same size and with similar parameters but two different businesses, which company stocks you should take? Naturally the ones with higher returns on capital. The business that provides higher returns on the capital is a good business.

Do you agree with the above? So Joel concludes that buying good business stocks at bargain prices is the formula for success. Joel's magic investing formula is based on these simple concepts.

Joel tested this formula for many years. In this book, he gives the results of his formula comparing them with US Market average and S&P 500 index. During the period of 17 years (1988-2004), Magic formula gave a return of 30.8% per year on an average, compared to 12.3 % of market average and 12.4% of S&P500. Even in the years 1990 and 2002, when markets were down, Magic formula withstood with lesser losses.

later in the book, Joel explains why and how magic formula works and finally gives the step by step formula for using the magic investing formula. A few additional points to remember are:

- Joel suggested an yearly review of portfolio using magic investing formula. One of the reasons is in US, the tax liability is less for long term capital gains (gains after one year). However irrespective of tax advantage, the portfolio is to be reviewed once in a year or so. This formula is equally applicable to any company shares across the world.
- The magic investing formula provides a long term investment strategy. It is important to stay with stocks as the formula suggests, irrespective of market fluctuations in the share price.

You can use the magic investing formula on your own, choosing your own stocks and buying them from your broker. Or in US, you can also use Joel's partnership investment firm, which provides strategies and software using magic investing formula.

I don't want to spoil your surprise by giving the exact formula here. The little book of around 150 pages takes less than two hours to complete but offers a great strategy for long term investment with low risk in the stock market.