Saturday, January 22, 2011

No time to invest? Try Joel Greenblatt's Magic Formula Investing!

Really don't have time? Worried you will be swayed by emotions and *gasp* panic sell?

Try's Joel Green Blatt's Magic Formula Investing which is basically a formula which looks for undervalued top-ranked small-mid cap companies to invest in and its mechanical because you punch in your criteria into the free search tool and you buy the stocks that come out and hold for a year before selling, and repeat the whole process.

Check out:

http://www.magicformulainvesting.com/welcome.html - the free screening tool is here.
http://www.fool.com/investing/general/2011/01/21/the-energy-industrys-magic-formula.aspx - Jim Royal on the Fool seems to endorse it alot. Search for his articles to read more.

Returns
I have listened to the Audiobook for this and it does makes sense and has consistent returns of 20% (based on historical analysis if you had punched in the formula and chosen the stocks that come out over the last few decades) and above but recognises that times have changed and the US is in decline so expect less. But thinking about it 15% is not bad returns - Double your money every 5 years?

One of the downsides is because of its lack of fundamental analysis of the companies that pop up - diversification (ie buying 20-30 stocks) is a must! If you have too small a portfolio, a few stocks going bad can really affect your portfolio! The formula does not account for say management, disaster (think Australia's flooding!) or fraud issues that can sink a stock.

Vs. Mutual funds
More troublesome than a mutual fund and requires slightly more time. But take a look/listen to what he has to say and you find he has decades of market data showing consistent returns. History is on his side and it makes perfect sense as it looks for undervalued companies in the market.

One for the Future
I definitely will give this option a go if I wanted to cut down the time I take looking and reading at news and spotting trends. All you need to do is spend time once a year and selling systematically.

Problem with having a diverse portfolio of 20-30 stocks needed means you need quite a lot of capital. Let's say you take medium-sized positions of USD1000 in each (RM3000*30) - Need RM 90k. :s (not including brokerage and other fees) Maybe one for the future.

Note: For us non-resident foreign investors, we do not have a capital gains tax fromselling earlier than one year. (http://www.investopedia.com/ask/answers/06/nonusresidenttax.asp)


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