Magic formula investing
What is magic formula investing?
Outlined by investor and Wharton graduate Joel Greenblatt, Magic formula investing is an investing technique that uses the principles of value investing in the stock market. The technique primarily aims to beat the market's average annual returns.
Where have you heard about magic formula investing?
Greenblatt refers heavily to magic formula investing in his 1980 book titled 'The Little Book that Beats the Market.' The easy-to-read book is written in plain English since Greenblatt famously penned it for his children (who were 6-15 at the time).
What you need to know about magic formula investing.
The formula essentially states that you can beat the market by purchasing at least 20 stocks and then rebalancing at the end of the year. Essentially, the formula consists of nine steps, with Greenblatt recommending that investors sell the losing stocks within a year to take advantage of the income tax provision; and selling the winning stocks once they have been held for one year in order to take advantage of reduced income tax rates on long-term capital gains.