A lot of business news is about the recession our economy is still in. And many articles say that recession will be here for a while longer. So it is no wonder that people who should be investing for their future in the stock market are nervous and unsure about putting their hard earned money into buying stocks. Yet, the fact is that people are making money in this up and down market. How do they do it? Could you do it without losing all that money you have put aside for retirement?
The people making money are using a technique known as magic formula investing. No, there is no magic wand to wave to make money in the stock market. This is a technique of investing using value investment theories. Value investing is seeking out businesses that are considered good investments but their shares are selling at bargain prices. Some well known value investors include Warren Buffett and Bill Ackman.
Step one is to look at companies that have market capitalization of at least $50 million, are U.S. domestic companies and are not a utility or financial company. Next, look at the company’s return on capital which is calculated as earnings divided by the total of working net capital and fixed net assets. The next factor to look at are the actual stock prices as compared to the company’s yield, defined as earnings divided by price.
Based upon these calculations you will be able to rank the companies on your list. Out of all of the companies on your list, buy shares in the top 20 to 30. And you do not want to just buy in once. You will want to buy stock in each company two to three times each month and do this over a one year period. At the end of the year, recalculate the numbers and rebalance your investments.
Tags: bill ackman, stock market, stocks, value investing, warren buffett