# Magic Formula Investing By Joel Greenblatt (The No-brainer Way To Make Money In Stocks)

what is up everyone I'm rose and welcome back to my channel in this video I'm going to talk all about the magic formula which is a super powerful investing strategy that has earned twenty to thirty percent returns over the last few decades just to give you an idea a 30 percent average annual return you can turn ten thousand dollars into a million in just 18 years the best part you don't need to be a stop genius to do this the magic formula is actually a really simple strategy that anyone can follow and it was described in detail in this great little book right here the little book that still beats the market written by Joel Greenblatt so if you're interested in making a 20 to 30 percent return on your money with the magic formula then keep watching hey and before we get started have you subscribed to my channel yet it's not what are you waiting for my channel is all about stock investing for beginners and you're gonna learn a ton about how to intelligently put your money to work so make sure to subscribe and hit the notification bell for new videos like this every week so let's dive straight in first I'll explain what the magic formula is and how it works then I'm gonna give you some background info on why it works and finally I'll walk you through how to implement it on your own the magic formula is a stock investing strategy developed by superstar hedge fund manager Joel Greenblatt his fund Gotham capital has an annual track record of 40% returns which is really hard to do basically Joel Greenblatt is a fucking legend in the investment world he explains everything you need to know about magic formula investing in his little book the little book that still beats the market and I'll summarize the key takeaways of the book for you in this video I've also linked to the book below in the description so you can check it out for yourself alright the magic formula is a system that ranks all the publicly traded companies in the u.s. in order of best investment – worst investment then using this ranking you buy the top 20 to 30 stocks and there's actually no rocket science involved this ranking system uses just ooh key metric so what are these two metrics I'll tell you what they are and then I'll explain each one in more detail the first metric is return on capital and the second metric is earnings yield return on capital is the percentage of a company's earnings relative to the capital spent to generate those earnings for example company a is a store that sells widgets it costs a million dollars of capital to build the store and hire employees and do all the stuff to get into business let's say that this store generates annual net profits of $100,000 so company a has a return on capital of 10% or $100,000 divided by the capital of 1 million on the other hand Company B is a similar store that sells widgets as well let's say it also costs a million dollars to get the store up and running but unlike company a Company B generates $500,000 of annual profits that's a return on capital of 50 percent so which would you rather invest in Company A or Company B the answer is obviously Company B the higher the return on capital the better because it means this business knows how to maximize profits given a fixed amount of resources sure great companies have great products with the O growth potential all that good stuff but all of those factors are very subjective and kind of qualitative the only way to know for sure whether a company is a good investment or not is to look at the numbers and the best number to look at is return on capital by definition great companies generate high returns on capital so that's the first metric the magic formula uses to rank the best stocks the second metric is earnings yield earnings eals compares a company's earnings to its purchase price for example going back to my widget examples Company A that earns $100,000 a year and let's say that the owner is willing to sell you the company for five million is it a good deal well it depends what is that five million gonna get you if you buy company you're gonna be entitled to its earnings of $100,000 a year on a purchase price of five million dollars that's an earnings yield of two percent and on the other hand let's say that you have the option to buy Company B and it's going for the same price of five million dollars but as you know Company B has earnings of five hundred thousand dollars in other words an earnings yield of ten percent so what's a better deal for you Company A or Company B the answer is again Company B even though they're both trading at the same price of five million dollars Company B is actually a better deal than Company A because you're gonna get more earnings for the same purchase price in other words more bang for your buck the higher the earnings yield the better and that is the second metric used by the magic formula to rank stocks when you screen stocks through these two metrics you end up with stocks of great companies at bargain prices that is what investing is all about it's common sense right you don't want to buy shitty companies you want to buy great companies and you want to buy those great companies not just that any price but at bargain prices you want the best of both worlds you want great companies bargain prices and so the magic formula is a simple systematic way to do just that when used to somatically buy stocks of above-average companies at below average prices you're bound to do really well in its book Greenblatt compares how a magic formula investing strategy performed relative to the S&P 500 over a 21-year period between 1988 and 2009 hopefully it comes out with an updated edition with more recent numbers but you can still get the idea the magic formula investing strategy generated twenty three point eight percent over that period compared to the S&P 500's nine and a half percent that means if you started with $10,000 in 1988 with the magic formula you'd have eight hundred eighty five thousand dollars by 2009 compared to 67 thousand dollars if you just stuck with the and p500 amazing right so what's the catch ah there's always a catch if it was that easy everyone would be doing this and we'd all be bajillion errors so like anything worth doing the magic formula works but it's a long-term investing strategy if you're looking to get into the rich then you're probably not gonna stick with this formula because it takes at least three to five years to work even though the magic formula outperforms the market over the long term it might actually underperform the market for small stretches of time unfortunately most people aren't patient or confident enough to keep the face at stick with the strategy long enough to enjoy those amazing 23.8% returns don't be one of those people if you're going to invest with the magic formula plan to stick with it for at least three years even if your friends are making more money in sexier stocks like Amazon and Tesla the key 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