Influenciado por el magnífico hilo de nuestro compañero Xturix y por la lectura del libro “The Little Book That Still Beats The Market” (2010) resumo a grandes rasgos la estrategia que propone el autor, Joel Greenblatt. Pienso implementar esta estrategia de manera progresiva a partir del mes de Febrero como complemento a mi cartera DGI. Me gustaría que este hilo fuese un punto de encuentro para todos los que de alguna forma sois seguidores de este estilo de inversión
Philosophy and Style
Invest in above-average companies (high return on capital) when they can be purchased at below-average prices (high earnings yield). Companies with a high return on capital are desirable because they are profitable, and can have the ability to grow with a high return on investment and expand earnings at a high level of growth. Short-term market distortions often allow investors to buy a good company when its earnings yield is high (earnings divided by price) and sell as the market correctly prices the company over the long term.
Universe of Stocks
The Magic Formula excludes micro-caps, foreign companies, utilities, and financial stocks. Greenblatt uses the largest 3,500 companies available for trading in the U.S.; this cut-off equals roughly a $50 million market cap (share price times number of shares outstanding) floor within the Standard and Poor’s database used for the research.
Criteria for Initial Consideration
- Establish a minimum market capitalization to match up with your liquidity needs. Greenblatt’s primary universe examines the largest 3,500 U.S. traded stocks in the S&P database, which is equal to about $50 million minimum market cap.
- Exclude foreign companies (ADR/ADS).
- Exclude stocks of utilities and financials (banks, insurance companies, etc.).
- Select stocks that have the best combined rank for earnings yield and return on capital. Greenblatt defines earnings yield as operating earnings before interest and taxes (EBIT) divided by the enterprise value (market value of equity plus net interest-bearing debt). Earnings yield measures earnings generated by the company relative to the purchase price of the company. Greenblatt defines return on capital as operating earnings before interest and taxes (EBIT) divided by tangible capital (net working capital plus net fixed assets). Return on capital measures the profitability of the assets employed by the company.
Investors can use www.magicformulainvesting.com to screen for stocks.
Portfolio Construction and Monitoring
- Construct a 20 to 30 stock portfolio by selecting five to seven stocks every two to three months until fully invested.
- Sell each stock after owning it for one year. After tax return can be optimized in taxable accounts by selling stocks showing a loss a few days before the one-year holding period and selling stocks with a gain just after the one-year holding period. Repeat initial investment steps to reinvest the proceeds of securities sold.
Performance
Greenblatt tested his investing strategy over a 17-year period and earned an average annual return of 30.8%. He held 30 stocks at a time and held each stock for one year.
In the book, Greenblatt devotes an entire chapter to explaining that the strategy is not a “magic bullet” that always works. During his test period, he found that, on average, five of every 12 months underperformed the market. Looking at full-year periods, once every four years the approach failed to beat the market.
Sticking to a strategy that is not working in the short run even if it has a good long-term record can be difficult, Greenblatt says, but he believes you will be better off doing just that. Following the latest fad or short-term investment ideas will not yield market-beating results, in his opinion. Discipline is his key to successful investing.
Influenciado por el magnífico hilo de nuestro compañero Xturix y por la lectura del libro “The Little Book That Still Beats The Market” (2010) resumo a grandes rasgos la estrategia que propone el autor, Joel Greenblatt. Pienso implementar esta estrategia de manera progresiva a partir del mes de Febrero como complemento a mi cartera DGI. Me gustaría que este hilo fuese un punto de encuentro para todos los que de alguna forma sois seguidores de este estilo de inversión
Philosophy and Style
Invest in above-average companies (high return on capital) when they can be purchased at below-average prices (high earnings yield). Companies with a high return on capital are desirable because they are profitable, and can have the ability to grow with a high return on investment and expand earnings at a high level of growth. Short-term market distortions often allow investors to buy a good company when its earnings yield is high (earnings divided by price) and sell as the market correctly prices the company over the long term.
Universe of Stocks
The Magic Formula excludes micro-caps, foreign companies, utilities, and financial stocks. Greenblatt uses the largest 3,500 companies available for trading in the U.S.; this cut-off equals roughly a $50 million market cap (share price times number of shares outstanding) floor within the Standard and Poor’s database used for the research.
Criteria for Initial Consideration
Establish a minimum market capitalization to match up with your liquidity needs. Greenblatt’s primary universe examines the largest 3,500 U.S. traded stocks in the S&P database, which is equal to about $50 million minimum market cap.
Exclude foreign companies (ADR/ADS).
Exclude stocks of utilities and financials (banks, insurance companies, etc.).
Select stocks that have the best combined rank for earnings yield and return on capital. Greenblatt defines earnings yield as operating earnings before interest and taxes (EBIT) divided by the enterprise value (market value of equity plus net interest-bearing debt). Earnings yield measures earnings generated by the company relative to the purchase price of the company. Greenblatt defines return on capital as operating earnings before interest and taxes (EBIT) divided by tangible capital (net working capital plus net fixed assets). Return on capital measures the profitability of the assets employed by the company.
Investors can use www.magicformulainvesting.com to screen for stocks.
Portfolio Construction and Monitoring
Construct a 20 to 30 stock portfolio by selecting five to seven stocks every two to three months until fully invested.
Sell each stock after owning it for one year. After tax return can be optimized in taxable accounts by selling stocks showing a loss a few days before the one-year holding period and selling stocks with a gain just after the one-year holding period. Repeat initial investment steps to reinvest the proceeds of securities sold.
Performance
Greenblatt tested his investing strategy over a 17-year period and earned an average annual return of 30.8%. He held 30 stocks at a time and held each stock for one year.
In the book, Greenblatt devotes an entire chapter to explaining that the strategy is not a “magic bullet” that always works. During his test period, he found that, on average, five of every 12 months underperformed the market. Looking at full-year periods, once every four years the approach failed to beat the market.
Sticking to a strategy that is not working in the short run even if it has a good long-term record can be difficult, Greenblatt says, but he believes you will be better off doing just that. Following the latest fad or short-term investment ideas will not yield market-beating results, in his opinion. Discipline is his key to successful investing.
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