The Little Book That Beats the Market (Little Books. Big Profits 8)

by Joel Greenblatt

Step 1 Go to magicformulainvesting.com. Step 2 Follow the instructions for choosing company size (e.g., companies with market capitalizations over $50 million, or over $200 million, or over $1 billion, etc.). For most individuals, companies with market capitalizations above $50 million or $100 million should be of sufficient size. Step 3 Follow the instructions to obtain a list of top-ranked magic formula companies. Step 4 Buy five to seven top-ranked companies. To start, invest only 20 to 33 percent of the money you intend to invest during the first year (for smaller amounts of capital, lower-priced Web brokers such as foliofn.com, buyandhold.com, and scottrade.com may be a good place to start). Step 5 Repeat Step 4 every two to three months until you have invested all of the money you have chosen to allocate to your magic formula portfolio. After 9 or 10 months, this should result in a portfolio of 20 to 30 stocks (e.g., seven stocks every three months, five or six stocks every two months). Step 6 Sell each stock after holding it for one year. For taxable accounts, sell winners after holding them a few days more than one year and sell losers after holding them a few days less than one year (as previously described). Use the proceeds from any sale and any additional investment money to replace the sold companies with an equal number of new magic formula selections (Step 4). Step 7 Continue this process for many years. Remember, you must be committed to continuing this pro...