Let this formula work its magic

All investors would like to see their investment portfolios perform better than the index. There are many methods that claim success but most require heavy number crunching or a lot of qualitative research. We at Wealth Insight went around looking for a method that is simple, easy to understand, and one that can be implemented by everyone (with access to a database). One such method is Joel Greenblatt's 'magic formula'. Joel Greenblatt is the founder and managing partner of Gotham Capital, a private investment partnership, which has given average annualised returns of 40 per cent since inception to its investors, which is a great track record by any yardstick. In his, “The little book that beats the market”, he explains how the lay investor can also produce great results by using the magic formula. What is the magic formula? The underlying idea behind the magic formula is to consistently invest in shares of good businesses that are trading at bargain prices. One way to do this is to invest in companies with high earnings yield. Two, the magic formula requires you to invest in good businesses that can earn a high rate of return on their capital employed. Further, the magic formula allows you to combine thes

This article was originally published on July 21, 2010.