This Ancient Investment Strategy is a ‘Modern-Day Financial Miracle’ — Here’s What You Need To Do
Written by
Dawn Allcot
Edited by
Nicholas Morine
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An investment strategy allegedly praised by hedge fund manager Joel Greenblatt is being touted as an “ancient investment strategy” and a “modern-day financial miracle” by one of its modern proponents.
Investor Porter Stansberry suggested this investment innovation has outperformed the S&P 500 10 times over the last 40 years. Of course, any investment carries risk — and even if you use this method, you could lose money rather than gain.
Simply put, Stansberry suggested investment in proven insurance companies with an established track record of accurate underwriting practices in order to generate profit. He expanded upon this idea in depth via his website.
But what if you would rather engage in more traditional methods offered up by the aforementioned Greenblatt?
Greenblatt’s investment strategy is simple enough — and can be started with such a small upfront investment — that virtually anyone can try it.
In his book “The Little Book That Beats the Market,” Greenblatt called this investment strategy “The Magic Formula.” And you can buy in with just three easy steps.
Open an Investment Account
If you don’t already have one, you’ll want to open an investment account or use an app that allows you to choose and purchase stocks.
Research Companies or Read Articles by Greenblatt To Find Stock Picks That Meet Certain Characteristics
Greenblatt ranks stocks based on earnings yield and return on capital. Yahoo! Finance called it “a combination of value investing and quality investing.” You are looking for companies that have a low stock price right now but show potential for high profitability in the future.
In his books “The Little Book That Beats the Market” and “The Little Book That Still Beats the Market,” Greenblatt noted that companies which earn a high return on capital typically have a special advantage, such as name recognition, a new product that is not likely to have a lot of competition, or a unique business model.
Familiarize Yourself With Greenblatt’s Model of EBIT
As Forbes noted: “Greenblatt measures the strength of a business by examining its return on capital, which he defines as operating profit (EBIT or earnings before interest and taxes) divided by tangible investment capital (net working capital plus net fixed assets).” It is necessary to familiarize yourself with this process if you want to employ the “Magic Formula.”
Forbes published a list of stocks across a variety of industries that meet Greenblatt’s requirements. Some of the names included Dick’s Sporting Goods, Alpha and Omega Semiconductor, and Moderna Inc.
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