Magic Formula Investing Tutorial (See My Actual Portfolio)

what is up everyone I'm rose and welcome back to my channel the number one place for financial education empowerment and inspiration about a month ago I posted a video about magic formula investing a supercharged stock investing strategy that has generated twenty to thirty percent returns over the last few decades so this video is the perfect follow-up for anyone who's interested in implementing that for your own portfolio but needs a very tactical step-by-step tutorial on how to do it when I started using the magic formula for my step IRA this year I discovered that while the magic formula sounds great on paper the actual implementation of it is not that straightforward the secret to doing the magic formula right is keeping really good records lucky for you I'm a total spreadsheet nerd and I've come up with the perfect step-by-step system so I'm gonna share all that with you in this video and I'm also gonna share my spreadsheet with you as well so if that sounds good to you give this video a like and with that we're gonna jump right in first of all if you haven't watched my original video about the magic formula make sure to watch that because it gives you a lot of helpful background info now I don't want to repeat myself too much in this tutorial but here is a quick recap so magic formula investing is like index fund investing but on steroids it's like if an index fund investor and we're Buffett had a baby you would get magic formula investing here's what I mean when you buy an index fund you own a little slice of the whole stock market an index fund has all the things the good stocks the bad stocks the mediocre stocks there's really no criteria whatsoever for what stocks make it into the index fund it's just if it's a stock and it's in the S&P 500 index it's in the index fund not exactly selective on the other hand an investor like Warren Buffett would do extensive research on each of the stocks that he buys and he'll only have about 8 to 10 major stocks in his portfolio so the magic formula is a mix of both it's a blend of index funds and selective stock investing the way Warren Buffett does it you are going to be selective about the stocks because the magic formula filters through two key metrics and again I talk about that in this video but you also are diversified just like an index fund would be because you own about 20 to 30 stocks you're not as strict as Warren Buffett but you're not as lenient as the index fund the magic formula falls somewhere in the middle so the magic formula is based on the fundamental principle that if you buy good companies at cheap prices then you're gonna do well and what's special about the magic formula is that it's pinpointed the exact financial metrics to help you do that without you having to do any extra research there's really nothing magical about the formula there's a lot of studies that demonstrate that an approach like this of buying good companies at cheap prices does outperform the market so now they have some background info and it's refresh your memory about the magic formula let's get into the actual tutorial step one is to make three key decisions before we start buying anything we need to figure out first what the total dollar amounts you have to invest is and for me I'm investing in my step IRA which is a type of retirement account for self-employed people and I have about fourteen thousand dollars in there so for you if let's say you're doing it in your Roth IRA and you have five thousand dollars then that's the total amount you have to invest for me it's um fourteen about fourteen thousand dollars it's a little more than that fourteen thousand three hundred the second thing you need to decide is how many stocks you're going to end up with in your portfolio and Joel Greenblatt in the book he says anywhere from 20 to 30 stocks is fine if you want to err on the side of more diversification then go for thirty you want to err on the side of less diversification less work and possibly more ups and downs and volatility then go for twenty I just kind of decided on a twenty one just because it's a nice even number in terms of makes it really easy – just by the nice clean number because the thing about this number is we're not gonna be buying all 21 stocks at once the magic formula wants you to buy them in batches spaced out over the course of almost a year so Joel Greenblatt says you could do say seven stocks every three months so that you end up with 21 at the end of nine months or you could do five stocks every two months so you end up with 30 I chose 21 because I'm going to do it every three months every three months I'm going to buy seven stocks so these are the three things you need to figure out the total dollar amount you have to invest how many stocks you want in your portfolio ultimately and based off of that how how often you need to buy stocks and how many you'll buy each time okay so um given that you are well in my example I'm going to invest $14,000 and I'm gonna have 21 stocks total that means I need to by just doing a little division here about six hundred eighty dollars of each stock okay so these aren't the three well four pieces of information actually that you need to know before we get on with it and now I'm gonna just show you a little bit of my actual portfolio um well surprise surprise I actually bought all 21 stocks already because I implemented this a little bit earlier this year so my tutorial today is gonna be more like a mock tutorial because I don't actually need to do anything yet but I made this spreadsheet and I will tell you how to download this spreadsheet or get a copy of it later on but um what I did was on April 1st I bought my first seven stocks and then three months later on July 1st I bought my my next batch of seven stocks right here and then three months later on October 1st I bought my last batch of seven stocks so now I have a portfolio with one on stocks in it and each time I eat stock I only bought about six hundred ninety dollars worth so my position in each stock is an equal dollar amounts of six hundred ninety dollars and again this is exactly how the book explains it and how Joel Greenblatt wants you to do it and the total of that adds up to about fourteen thousand dollars which is what I have in my step IRA so this is what your portfolio would look like after you finish implementing everything but let's say you're just sitting down from scratch and you don't have any of this okay so here is a blank copy of my spreadsheet let's say I am sitting down from scratch and I just gotta do this from the very beginning so what I need to do um is to note today's date I'm going to write it down here date purchased today's date is October 28 2019 and I'm going to buy seven stocks today so I've got to fill this in right here and then three months later I'm going to buy another batch of stock so yep so basically I've mapped it out I'm going to buy seven stocks on today on October