I read the book Magic Formula Investing. I was not impressed.
Mr. Greenblatt, the author, says buy the thirty stocks with the highest ROIC (100%), hold them for one year and then sell them. This process is repeated year after year. While not specifically stated, I guess the investment return to the person following this stragey is very good.
I never understood why Mr. Greenblatt was trying to sell a book when he has THE formula that should be making him wealthy beyond description?
I also don't quite grasp the need to sell after one year. According to Mr. Greenblatt, one year was chosen because the ROIC formula works with trailing twelve month tax returns.
I guess the part that didn't make sense to me was sell first and then reassess. Why? According to Mr. Greenblatt, it takes 3-5 years for the "formula" to work, so why not hold the stocks, reassess, and go from there?
I've always wondered if a person bought a stock, not a stock of the day but just a stock, and paid no attention to the stock's price or value, if the price of that stock would go up any significant degree over a 3-5 year period? I have a feeling it probably would.
Wow! Could that be a new investing strategy? Just pick a stock, any stock other than one constantly in the news, then buy that stock and hold it for 3-5 years, five years being preferable to three.
After three to five years, sell half and hold those shares for 3-5 years, and then sell half again. And so forth and so on until all the shares are gone.
I wonder what the return would be with that strategy over the course of an investing lifetime?
Just think, if a person were to actually use such a strategy and couple it with using a margin of safety for the stock purchase they might just do okay...over the longer term that is. Hmmmmm.
At the end of the day, I personally believe the only Magic Formula that will consistently provide an investor with returns that far outweigh the risk taken, is buying with a margin of safety.
Something I don't see Mr. Greenblatt's formula doing.