Login - Become a member

So, for the composite rankings

Forums home -> General Discussion -> So, for the composite rankings

post reply

So, for the composite rankings 
By xiaohe52000 on Apr 19, 2014 03:34 AM
After 6 years of operation and hundreds of articles, I recently became aware that MagicDiligence had never posted an article detailing just how the strategy we followed, Magic Formula Investing (MFI), actually works! It is time to remedy that today.

First of all, some background. MFI was invented by Wholesale Lions Jerseys very successful former hedge fund manager and current professor Joel Greenblatt. He outlined the theory and method to the strategy in his 2005 book The Little Book That Beats the Market, which was subsequently updated in 2010. I highly, highly recommend anyone with even a passing interest in the Wholesale Jerseys strategy to read the book. It is quite short, under 200 pages, and takes all of 2 3 hours to read. It is one of wholesalecheaplionsjerseys.com the best investment books out there, for anyone.

Greenblatt found that when he did a ranking of the stocks in the market based on two simple statistics EBIT/EV earnings yield and pre tax return on tangible capital the stocks at the top of the composite rankings annihilated the S 500's returns. This was no small difference. MFI stocks generated a 30% annual return from the study's 1988 2004 trial period, vs. the S 12% figure. What's more, when breaking the ranked stocks down into deciles, there was a perfectly linear correlation between ranking and performance.

The "official" stock screen for MFI http://www.wholesalecheaplionsjerseys.com/ is still available for free here. From it you can generate any list of stocks from a minimum market cap, showing you the top 30 or 50 stocks in the market ranked by MFI statistics.

I think the ranking system is easiest to explain with an example. This example was done using the Portfolio Ranker tool.

The first thing to do is to calculate and rank each Cheap Lions Jerseys of these stocks by their earnings yield (EY, see this article for the full details behind this calculation). Here are the results:

NOC 11.3%, rank 1

RTN 10.7%, rank 2

GD 9.2%, rank 3

LMT 9.0%, rank 4

BA 6.8%, rank 5

Now we do the same thing, separately, for pre tax return on tangible capital (ROTC,explanation here). The rankings here are:

RTN 66.6%, rank 1

NOC 56.8%, rank 2

GD 46.9%, rank 3

LMT 30.3%, rank 4

BA 6.8%, rank 5

So, for the composite rankings, we simply add the rank score together for both the earnings yield and return on capital lists to get a composite, then order the stocks from lowest to highest. The final, MFI style ranking looks like this:

RTN score 3 (2 EY + 1 www.wholesalecheaplionsjerseys.com ROTC)

NOC score 3 (1 EY + 2 ROTC)

GD score 6 (3 EY + 3 ROTC)

LMT score 8 (4 EY + 4 ROTC)

BA score 10 (5 EY + 5 ROTC)

Raytheon and Cheap Jerseys Northrop actually tie for the best MFI ranking this is not uncommon. Boeing scores as the least attractive of the "big 5" from a statistical standpoint. It is both the most expensive vs. earnings and the least efficient in terms of earning profits on invested capital.

Now, if you can imagine expanding our set of stocks out to all of the NYSE, NASDAQ, and AMEX listings, (minus financials, utilities, and foreign firms with ADR listings), then applying the same process, you understand how the MFI rankings work!
Reply with quote

post reply

Page 1 of 1 Go to page: 1
Subscribe to RSS
Follow us on Twitter


Copyright © 1996-2010 Raphael Benedet - Contact Us