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Magic Formula Investing With Zecco
By admin | September 30, 2007
If you have been hanging around the trading market lately you may have heard of something called ‘Magic Formula Investing’. What is it and is it beneficial to you?
Magic formula investing is a method of investing that is relatively simple and straightforward. It’s intended to help you outperform the market over a period of time extending longer than one year.
The magic formula investing strategy involves looking for companies that generate a good return on investment and then buying them when they are on sale.
This will then give you a high earnings yield, which is exactly what you are looking for. There is a website that is dedicated to the practice of Magic formula investing and will provide you with a list of companies that are good choices and fulfill the requirements.
Basically, to use the formula yourself, these are the steps you will take.
First you choose a set of available companies that you feel you can easily invest into. You are looking for something that is not too small and something that is not going to be hard to trade either.
Next, you are to remove all the utilities, financial stocks and foreign companies from this list you have created. These types of companies are not recommended when using the magic formula process.
Once you’ve come up with that new list, then you want to rank the stocks in order going by their return on capital as well as their earnings yield. This will give you a clearer picture as to what you’re dealing with here.
After that list has been made, then proceed to add up the two numbers that you derived in the previous step and then rank them based on this new number.
The stocks that come out on top are going to be the first ones you want to invest in as they are likely to give you the most success. Note that when investing in the stocks themselves, you are going to want to invest an equal dollar amount in each company, not an equal number of shares. So if one stock price is much higher than another, you would simply buy less of that stock to equal the same dollar figure.
Now comes the part that many people have the most difficulties with. You’ll want to hold these stocks for a minimum time period of one year. Note that you should sell one day prior to the year if the stock is not making money and one day after the one year mark if the stock is. This will be beneficial for tax purposes.
If the one year mark comes and a stock that you are currently holding is still in one of the top positions as one in which you should buy, then the option to hold or sell becomes yours. This will dependant on your individual strategy for cashing in on your stocks and whether or not you are going to continue trading for the year to come.
After you’ve done the initial steps and have selected a few funds and invested in them, then you can repeat the process every two to three months (or monthly if you are a high volume investor).
The self-reported returns that individuals have experienced using this method are around the 31% mark. Compared to more traditional methods that bring you in closer to 11-13%, you can see why this is such a hot practice to try. At over double the profit, it could be extremely lucrative if it works out well for you.
One important factor to keep in mind however is that some have found that if you are limiting yourself to working strictly with larger stocks, the returns will drop by as much as 15%!
For this reason, it is best to slightly diversify the size of the companies you are going to buy into but still avoiding ones that are extremely small. Remember that you do have to hold the stock for a period of a year so this is a crucial factor that must be considered.
So if you are looking for a new trading strategy to try or are just getting started with your trading venture and are a little lost as to how to go about choosing what to invest in, give the Magic Formula a try.
Topics: investing |
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