THE MAGIC IN­GRE­DI­ENTS:

2 SIM­PLE STEPS TO BET­TER IN­VEST­ING

Shares - - TALKING POINT - BY IAN CON­WAY AND THE SHARES TEAM

There are few truly great in­vestors who re­li­ably beat the mar­ket, and even they will ad­mit they don’t get it right ev­ery time.

Most in­vestors, pri­vate and pro­fes­sional, are do­ing well if they can match an in­dex over the long term.

Even if you in­vest with a pro­fes­sional man­ager who does per­form in line with the in­dex, af­ter man­age­ment fees your re­turns will be lower.

That is one of the rea­sons why in­dex in­vest­ing has be­come so pop­u­lar over the last decade. If you don’t have the time or the skill to pick stocks your­self, by us­ing an in­dex or tracker fund you can get the same re­turn as the mar­ket with much lower fees than an ac­tively-man­aged fund.

While that’s fine if you want to in­vest in funds, what about those who are happy to in­vest in in­di­vid­ual com­pany shares – is there any way you can get some help to beat the mar­ket? The an­swer is yes.

THE ORI­GIN OF THE ‘MAGIC FOR­MULA’

In Lit­tle Book That Beats The Mar­ket, vet­eran money man­ager Joel Green­blatt ar­gues that you can suc­ceed. More­over he ar­gues that any­one can do it, and that the re­sults are re­peat­able.

Green­blatt wrote in his book, pub­lished in 2006, that a port­fo­lio of 30 stocks fol­low­ing his ‘Magic For­mula’ de­liv­ered ap­prox­i­mately 30.8% per year in the pre­ced­ing 17 years. Dur­ing that pe­riod the over­all mar­ket av­er­aged a re­turn of 12.3% a year.

In the book he ar­gues that in­vestors need to view their re­la­tion­ship with com­pa­nies as if they are ac­tively in­volved in them.

He sets out two sim­ple cri­te­ria for buy­ing com­pa­nies. The first is to only buy good busi­nesses, the sec­ond is only to buy them at bar­gain prices.

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