Magic Formula Investing
Definition of 'Magic Formula Investing'
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.
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