THE MAGIC INGREDIENTS:
2 SIMPLE STEPS TO BETTER INVESTING
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.