One question almost every investor asks is whether it is possible to achieve market returns by choosing a diversified group of stocks in line with a formula, rather than having to evaluate each and every stock from just about every angle.
A lot of investment writers have proposed at least one such formulaic approach during their lifetime. The most promising formulaic approaches have been articulated by 3 men: Benjamin Graham, David Dreman, as well as Joel Greenblatt.
As each of these approaches appeals to logic and common sense, they are not exclusive to these 3 men. But, they are the three names with which these approaches are usually most closely associated; so, there's very little need to draw upon solutions beyond theirs.
Unless of course, if you're new to investing, ask investment counselor about acquisition mergers just before you begin buying and selling shares. If you're just looking for an alternative approach to generate profits for your own company, find out about going public by searching: company go public or why go public.
Benjamin Graham wrote 3 books: "Security Analysis", "The Intelligent Investor", as well as "The Interpretation of Financial Statements".
Inside of each book, he hints at different workable approaches both in stocks and bonds; however, he is most specific in his best known work, "The Intelligent Investor".
David Dreman is regarded as a contrarian investor. In his case, it is an appropriate label, due to his keen interest in behavioral finance. Having said that, in most situations the line separating the value investor from your contrarian investor is fuzzy at best.
Dreman's contrarian investing strategies are derived from three measures: price to earnings, price to cash flow, and then price to book value. Of those measures, the price to earnings ratio is by far the most conspicuous.
Finally, there's Joel Greenblatt's "magic formula". This can be the most intriguing formulaic method for investing, both because it does not subject stocks to any true/false tests and simply because it's a composite of the two most important readily quantifiable measures a share has: earnings yield and return on capital.
As you may recall, earnings yield is simply just the inverse of the P/E ratio; so, a stock having a high earnings yield is simply a low P/E stock. Return on capital may be thought of as the quantity of pennies earned for each and every dollar invested in the business.
The precise formula that Greenblatt utilizes is described in "The Little Book That Beats the Market". Greenblatt states that his magic formula may be used in two different ways: as an automated portfolio generation tool or as a screen.
For an investor like you (that's, one with enough curiosity and commitment to frequent a site such as this) the latter use could be the more acceptable one. The magic formula may serve you well as a screen.
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