MAGIC FORMULA INVESTING
Discipline in Investment
Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffett's investing strategy it might be to "buy good businesses at a fair price with the intention of holding them forever." An investment strategy helps provide focus and ensures emotions are held in check when making decisions. Having an investment strategy for both asset mix and security will provide discipline to be a successful investor over the long term. In this article, we will look at different investment strategies and how you can pick the right one for you.
Margin of Safety
• The difference between the intrinsic value of the share and the market price of the share
• To buy the shares at the cheaper price
• Cheaper price doesn’t mean the shares are performing shares
Safety Margin
• Avoid investing your entire sum in a single purchase; make multiple purchases at various prices.
• At least 30% of your entire investment should be kept as safety margin
www.magicformulainvesting.com
• Establish a minimum market capitalization (usually greater than $50 million).
• Exclude utility and financial stocks.
• Exclude foreign companies (American Depositary Receipts).
• Determine company’s earnings yield
• Determine company’s return on capital
• Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
• Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
• Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
• Continue over a long-term (5–10+ year) period.
Indian market
• Select companies above market cap of 20000 crore only
• Remove financial stocks
• Determine company’s earnings yield
• Determine company’s return on capital
• Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital
1. ROCE = EBIT/ (Net Working Capital+ Fixed Asset)
2. Earnings Yield= EBIT/ EV
Enterprise Value (EV)=
(Share price * No. of shares) + (Short term debt + Leases + Long term Debt + Preferred Stock - Casnking of Stocks:
Comparison of Index Returns and Joel’s Portfolio returns:
Year Index Returns Joel’s Returns
2011 25.06 33.36
2012 -2.99 27.62
2013 12.54 47.23
2014 -3.39 -2.52
2015 10.95 18.99
2016 -0.99 -9.69
2017 7.25 16.63
Discipline in Investment
Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffett's investing strategy it might be to "buy good businesses at a fair price with the intention of holding them forever." An investment strategy helps provide focus and ensures emotions are held in check when making decisions. Having an investment strategy for both asset mix and security will provide discipline to be a successful investor over the long term. In this article, we will look at different investment strategies and how you can pick the right one for you.
Margin of Safety
• The difference between the intrinsic value of the share and the market price of the share
• To buy the shares at the cheaper price
• Cheaper price doesn’t mean the shares are performing shares
Safety Margin
• Avoid investing your entire sum in a single purchase; make multiple purchases at various prices.
• At least 30% of your entire investment should be kept as safety margin
www.magicformulainvesting.com
• Establish a minimum market capitalization (usually greater than $50 million).
• Exclude utility and financial stocks.
• Exclude foreign companies (American Depositary Receipts).
• Determine company’s earnings yield
• Determine company’s return on capital
• Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital (ranked as percentages).
• Invest in 20–30 highest ranked companies, accumulating 2–3 positions per month over a 12-month period.
• Re-balance portfolio once per year, selling losers one week before the year-mark and winners one week after the year mark.
• Continue over a long-term (5–10+ year) period.
Indian market
• Select companies above market cap of 20000 crore only
• Remove financial stocks
• Determine company’s earnings yield
• Determine company’s return on capital
• Rank all companies above chosen market capitalization by highest earnings yield and highest return on capital
1. ROCE = EBIT/ (Net Working Capital+ Fixed Asset)
2. Earnings Yield= EBIT/ EV
Enterprise Value (EV)=
(Share price * No. of shares) + (Short term debt + Leases + Long term Debt + Preferred Stock - Casnking of Stocks:
Year Index Returns Joel’s Returns
2011 25.06 33.36
2012 -2.99 27.62
2013 12.54 47.23
2014 -3.39 -2.52
2015 10.95 18.99
2016 -0.99 -9.69
2017 7.25 16.63
|
Company Name
|
EBIT
Rs.(in Crs)
|
NWC Rs.(in
Crs)
|
NFA Rs.(in
Crs)
|
ROC
|
Score
|
EV Rs.(in
Crs)
|
EY
|
Score
|
MCAP Rs.(in
Crs)
|
Total Score
|
Rank
|
|
ABB
India Ltd.
|
4191
|
2144
|
1322
|
1.209175
|
4
|
21429
|
0.19557609
|
1
|
30,585.80
|
5
|
1
|
|
Bajaj
Auto Ltd.
|
5691
|
1665
|
2077
|
1.520844
|
3
|
68928
|
0.08256442
|
6
|
81,725.93
|
9
|
2
|
|
Cadila
Healthcare Ltd.
|
2777
|
1003
|
2452
|
0.803763
|
8
|
33326
|
0.08332833
|
5
|
53,807.91
|
13
|
3
|
|
Glenmark
Pharmaceuticals Ltd.
|
1879
|
1806
|
1701
|
0.535786
|
11
|
23113
|
0.08129624
|
7
|
17,693.35
|
18
|
4
|
|
Bajaj
Finance Ltd.
|
4952
|
7473
|
287
|
0.638144
|
9
|
72801
|
0.06802104
|
10
|
77,025.83
|
19
|
5
|
|
Bharat
Petroleum Corporation Ltd.
|
13067
|
-3623
|
36085
|
0.402532
|
17
|
76835
|
0.17006573
|
2
|
91,217.08
|
19
|
6
|
|
Adani
Ports and Special Economic Zone Ltd.
|
4264
|
-565
|
9376
|
0.483941
|
13
|
63744
|
0.06689257
|
11
|
75,682.93
|
24
|
7
|
|
Ashok
Leyland Ltd.
|
2275
|
81
|
5129
|
0.43666
|
16
|
31308
|
0.07266513
|
8
|
27,026.55
|
24
|
8
|
|
Britannia
Industries Ltd.
|
1233
|
75
|
713
|
1.564721
|
2
|
32082
|
0.03843277
|
23
|
43,803.42
|
25
|
9
|
|
Eicher
Motors Ltd.
|
1924
|
-22
|
959
|
2.053362
|
1
|
51961
|
0.03702777
|
24
|
73,921.27
|
25
|
10
|
|
Colgate
Palmolive (India) Ltd.
|
1010
|
-62
|
1086
|
0.986328
|
6
|
22222
|
0.04545045
|
20
|
30,225.76
|
26
|
11
|
|
Bharti
Airtel Ltd.
|
23809
|
-16486
|
95611
|
0.300904
|
25
|
182616
|
0.1303774
|
3
|
146,384.79
|
28
|
12
|
|
Aurobindo
Pharma Ltd.
|
2635
|
2442
|
3310
|
0.458102
|
14
|
46175
|
0.05706551
|
15
|
39,385.94
|
29
|
13
|
|
Bharat
Heavy Electricals Ltd.
|
1995
|
7033
|
1388
|
0.236908
|
27
|
21936
|
0.09094639
|
4
|
33,042.60
|
31
|
14
|
|
Container
Corporation of India Ltd.
|
1462
|
262
|
3824
|
0.357807
|
20
|
23398
|
0.06248397
|
12
|
28,373.62
|
32
|
15
|
|
Dabur
India Ltd.
|
1329
|
479
|
715
|
1.113065
|
5
|
43860
|
0.03030096
|
27
|
51,048.86
|
32
|
16
|
|
HCL
Technologies Ltd.
|
6246
|
12986
|
3655
|
0.375338
|
19
|
106192
|
0.05881799
|
13
|
121,540.55
|
32
|
17
|
|
GlaxoSmithkline
Consumer Healthcare Ltd.
|
1133
|
1941
|
537
|
0.457224
|
15
|
22668
|
0.04998235
|
19
|
22,608.22
|
34
|
18
|
|
Godrej
Consumer Products Ltd.
|
1040
|
15
|
1242
|
0.827367
|
7
|
46820
|
0.02221273
|
29
|
65,173.97
|
36
|
19
|
|
Bosch
Ltd.
|
2266
|
3080
|
1286
|
0.519011
|
12
|
63459
|
0.03570809
|
25
|
72,625.63
|
37
|
20
|
|
Asian
Paints Ltd.
|
3017
|
2554
|
2824
|
0.560989
|
10
|
102581
|
0.0294109
|
28
|
110686
|
38
|
21
|
|
Ambuja
Cements Ltd.
|
2259
|
498
|
6298
|
0.332401
|
23
|
40667
|
0.05554873
|
16
|
48,310.75
|
39
|
22
|
|
DLF
Ltd.
|
1918
|
12101
|
4099
|
0.118395
|
31
|
27813
|
0.06896056
|
9
|
34,261.78
|
40
|
23
|
|
ACC
Ltd.
|
1430
|
54
|
7723
|
0.183876
|
29
|
24747
|
0.05778478
|
14
|
30729
|
43
|
24
|
|
Cipla
Ltd.
|
2312
|
3382
|
4396
|
0.297249
|
26
|
42228
|
0.0547504
|
17
|
43,538.21
|
43
|
25
|
|
Cummins
India Ltd.
|
1011
|
1109
|
1808
|
0.346589
|
21
|
23254
|
0.04347639
|
22
|
25,166.99
|
43
|
26
|
|
Bharti
Infratel Ltd.
|
3151
|
3252
|
6263
|
0.331161
|
24
|
69336
|
0.04544537
|
21
|
68,833.17
|
45
|
27
|
|
Dr.
Reddy's Laboratories Ltd.
|
2679
|
12579
|
5044
|
0.152017
|
30
|
53591
|
0.04998974
|
18
|
43,833.12
|
48
|
28
|
|
Glaxosmithkline
Pharmaceuticals Ltd.
|
600
|
1093
|
471
|
0.383632
|
18
|
30860
|
0.01944264
|
30
|
20,970.35
|
48
|
29
|
|
Bajaj
Finserv Ltd.
|
197
|
502
|
76
|
0.34083
|
22
|
26888
|
0.00732669
|
31
|
65,264.72
|
53
|
30
|
|
Emami
Ltd.
|
700
|
1694
|
2002
|
0.189394
|
28
|
21713
|
0.03223875
|
26
|
24,744.01
|
54
|
31
|
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