Magic Formula Investing

The Magic Formula Investing is a stock-picking strategy created by Joel Greenblatt. It is based on the idea that the market is inefficient and that there are some stocks that are undervalued. The Magic Formula uses two simple ratios to identify these undervalued stocks: the price-to-earnings ratio (P/E) and the earnings yield.

The P/E ratio is a measure of how much investors are willing to pay for a company's earnings. A high P/E ratio means that investors are paying a lot for each dollar of earnings. A low P/E ratio means that investors are paying less for each dollar of earnings.

The earnings yield is the inverse of the P/E ratio. It is a measure of how much a company's earnings are worth. A high earnings yield means that a company's earnings are worth a lot. A low earnings yield means that a company's earnings are not worth much.

The Magic Formula uses the P/E ratio and the earnings yield to identify undervalued stocks. It looks for stocks that have a high earnings yield and a low P/E ratio. These stocks are considered to be undervalued because they are trading at a price that is below their true value.

The Magic Formula has been shown to be a successful investment strategy. A study by the Journal of Finance found that stocks that met the criteria of the Magic Formula outperformed the market over a 15-year period.

The Magic Formula is a simple and easy-to-use investment strategy. It does not require a lot of research or analysis. However, it is important to remember that the Magic Formula is not a guarantee of success. There is always the risk of losing money when investing in stocks.

If you are interested in trying the Magic Formula, there are a few things you should keep in mind. First, you should only invest in stocks that you understand. Second, you should be prepared to hold your investments for a long period of time. Third, you should be aware of the risks involved in investing in stocks.

The Magic Formula is a good starting point for investors who are looking for a simple and easy-to-use investment strategy. However, it is important to remember that the Magic Formula is not a guarantee of success. There is always the risk of losing money when investing in stocks.