Value Investing Algorithm
Author: raj
Category: Investing
Via Joel Greenblatt:
- 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 = EBIT / enterprise value.
- Determine company’s return on capital = EBIT / (Net fixed assets + working 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 day before the year-mark and winners one day after the year mark.
- Continue over long-term (3-5 year) period.