n Brief Magic Formula Investing is a value investing strategy based on buying 20-30 "good, cheap companies" defined as having the best available combined ranking in terms of earnings yield and a return on capital. Background A widely respected hedge-fund manager, Joel Greenblatt started as a value purist but was influenced by Warren Buffett's view about growth being part of the value equation. He founded Gotham Capital, a fund which apparently returned over 40% annualized from 1985 to 2005. By 1995, it had returned all money to its outside investors. He has authored two books, You Can Be A Stock Market Genius and New York Times bestsellier, “The Little Book That Beats the Market”, and is also adjunct professor at Columbia University Business School. Greenblatt espouses MFI as a do-it-yourself version of the approach he has used while amassing his investment track record. With the “Little Book”, Greenblatt wanted to write a book his children could read and learn from. The main point Greenblatt makes is that investors should buy good companies at bargain prices. Magic Formula Investing uses return on capital and earnings yield as its inputs. Return on capital is seen as the best determinant of whether a business is a good one or not. Companies that can earn a high ROC over time generally have a special advantage that keeps competition from destroying it (e.g. name recognition, a new product that is hard to duplicate or a unique business model). Earnings yield is the metric that shows whether a company is cheap or not. Greenblatt says that stock prices of a firm can experience “wild” swings even as the value of the company stays relatively constant giving investors opportunities to buy low and sell high. Calculation / Definition of the Magic Formula Define minimum Market Capitalization that meets your liquidity needs. Greenblatt used a market capitalization floor of $50 million, but advised that you can set the minimum as high as $5 billion. Sector Filter: Due to their unique financial structures, all stocks in the financial and utility sectors are excluded. Calculate Earnings Yield = EBIT / enterprise value. Calculate Return on Capital = EBIT / (Net fixed assets + working capital) EY Rank: Rank the stocks in descending order based on Earnings Yield and assign a rank number to each. ROC Rank: Rank the same stocks in descending order based on Return on Capital and assign a rank number to each. Add the rankings and select stocks that have the lowest combined ranking score. So a company that is ranked 358nd best in terms of ROC and 122rd highest in EY would gets a better combined ranking (i.e. 470) than a company that is ranked 1st in ROIC but only 950th best in EY (i.e. 951). As noted elsewhere, one of the advantages of the MFI’s relative approach is that the system never runs out of investment candidates. Several value investment strategies h
RE: For those who really havent a c..
Worsley, I would like to add my congratulations to Ameirsur & shareholders. I had thought/hoped Sound Oil would win, but it does look like both companies are worthy of accolades. They are managing costs in a difficult environment whilst their projects have great potential to add value for shareholders: I'll drink to that! Crude
For those who really havent a clue
UK Stock Market Awards (Malcy blog) I was lucky enough to be invited to this glittering ceremony last night and in the ‘Best Oil & Gas PLC’ award the winner was Amerisur Resources so many congratulations to the team there. Worth a mention were runners up Sound Oil and Premier who are both bucket list favourites, as is Amerisur. Elsewhere Liberum won a gong and new outfit Camarco who are very strong in oil & gas were runners up in the ‘ Best Adviser-Financial PR’ category.
Amerisur is on my watch list but there are much better oil/gas plays than them IMO.
21 Mar '15
Tradenor - only interested in Amerisur. Not at all interested in any other oil company.
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