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So, is there a formula in the stock market that can beat the market? If I say yes, is there a proven formula? In today's discussion, we will talk about an investment formula that can beat the average market return. Welcome. If you like our analysis, then definitely like it and let us know. Share your opinion in the comment section.
And don't forget to subscribe for future updates. And yes, you can also join our WhatsApp group to get the latest analysis updates. Your support is our motivation to move forward. So let's get started. Is there an easy data-based way to find good stocks among so many companies on the Dhaka Stock Exchange?
This question worries almost all investors. The answer may be hidden in one number, 30.8%. It sounds incredible, doesn't it ? This is the 16-year god return of Jewel Green Blade's famous formula that he got in his initial back test. So let's see what we will talk about today . First, we will understand the magic or real trick of the formula.
Then we will see how to find good companies cheaply. Then we will know the nine-step recipe for investment and of course, we will see the evidence that this formula works at all. And finally, we will discuss how it can be applied in our country's market. So let's start with the first part. The magic promise of the formula.
Now, don't think of any magic toner just by hearing magic. It is actually a very smart and powerful mental shortcut for investing. This mental shortcut is technically called a heuristic. It means a method that helps us solve all complex problems or make quick decisions. For example, many people may know about the Rule of 72.
With which you can easily understand how many years your invested money will double. This is also a heuristic. This magic formula by Jewel Green Blatt is just such an investment heuristic. Its main purpose is to find good companies at cheap or attractive prices. That means, it is not a guesswork, but a systematic method.
Now let's come to the second part, good companies at cheap prices! So, what is the secret of this formula? Let's now learn about the two main components that make it so effective. See, it is very simple. On the one hand, we are looking for cheap or chip companies, which are measured by one thing. And that is earnings yield.
The higher it is, the better. And on the other hand, we are looking for good or good companies. Which is measured by return on capital. The higher it is, the better. The combination of these two is the real game. First, let's come to earnings yield. Its formula is to divide EBIT or operating earnings by the company's enterprise value.
In simple terms, it is a measure of how cheap the company's price is compared to its earnings. The higher the earnings yield, the more attractive the company is for investment. And the second is Return on Capital or ROC. Its formula is EBIT divided by the sum of net fixed assets and net working capital.
This shows how efficient a company is in using its capital or assets to make a profit. The higher the ROC, the easier it is to understand that the company's management is very good. There is a lot of theory. Now let's take a look at the recipe directly. That is, how to build your own portfolio using this formula step by step.
The first five steps are for creating a list. Step one, first set a minimum market cap. For example, you want to work only with large companies in Bangladesh. Step two, exclude companies in the financial and utility sectors. Because their calculations are a little different. Step three, exclude foreign companies.
And steps four and five, find out the earnings growth and return on capital for the companies that survived. And then comes the real step. Step number six. But here is all the fun. In this step, each company is ranked separately based on those two metrics. Look at this table and the matter will become very clear.
Suppose Fox Company's Earning Shield Rank One and C Rank Two, then its total score is three, similarly for the rest. Now the rule is that the one with the lowest total score is our star player; because it means the company. At the same time, it is cheap and good. Patience and discipline play a big role in the last three steps.
Step Seven Ranking: Invest in the top 20 to 30 companies for a year. Step Eight: Reorganize the portfolio every year. That means selling stocks that are out of the ranking and buying new stocks. Whether it is a profit or a loss. And not the most important step. To get good results, this process has to be continued for at least five years.
A lot has been said. But the real question is, does this formula really work? Or is it all talk. Let's look at some real data. Green Latten's own backtest shows that the Magic Formula gave an average annual return of 30.8% from 1988 to 2004. And during the same period, the return on the American SNP side was only 12.4%.
The difference is sky-high. And this is not just a story of the American market, its effectiveness has been proven in various studies all over the world, from Brazil, Hong Kong, China, Thailand to the Nordic countries. This means that the logic behind this formula is quite strong. So far, we have talked about foreign countries.
Now let's come to the most important part. How will this formula work in our country's market, meaning Bangladesh, and what should we be careful about. So the question is what is the Magic Formula? A system that can be used blindly for the Dhaka Stock Exchange. The answer is absolutely not. It is very important to keep some things in mind for our market .
First of all, the cyclical industry. For example, we have to be careful about cement or steel companies. Their profits in good times make our heads spin. But in bad times, the opposite can also happen which can lead you in the wrong direction. Secondly, some companies may have a lot of cash lying around.
Which increases their earnings yield rank. But their core business may not be doing well. So always remember that this formula is a great starting point for research but it cannot be a substitute for research. You must know the company's business, its financial condition and the integrity of the directors yourself.
So what is the point? The magic formula gives you a strong and logical starting point for finding good investment opportunities. It helps you to create a shortlist. But deep analysis is essential before making a final decision. So in the end, the question is this. Is just one formula enough for a successful investment or is it just the beginning of a long and exciting journey? The answer is left for you to ponder.
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