If you're looking to find Magic Formula investment ideas in India, you've come to the right place.
You might already be familiar with the Magic Formula strategy by Joel Greenblatt, explained in his book, The Little Book That Still Beats the Market. It’s also the strategy that got me started with quantitative investing, and it’s been incredibly helpful for investors around the world.
Your Step-by-Step Guide to the Magic Formula
This article will guide you step-by-step on how to find Magic Formula stocks in India. And, I’ll show you how you can boost your returns based on extensive testing we've done. So, keep reading.
But first, let’s cover the basics…
Finding Quality, Undervalued Companies
The Magic Formula identifies high-quality companies trading at attractive prices. It looks for companies with:
- High earnings yield (meaning they are undervalued)
- High return on invested capital (ROIC) (indicating they are quality companies)
The formula ranks companies by both ROIC and earnings yield, then combines those rankings to give you a Magic Formula score (lower is better). The company with the lowest score is considered the best investment option.
We’ve Done the Work for You
If this sounds like a lot of work—don’t worry. We have already done it for you. With just a few clicks, you can get a list of the best Magic Formula companies in India.
Keep reading, and I'll show you exactly how.
Click here to start finding your own Magic Formula ideas in India Now!
First a bit of background information to show you that the Magic Formula also works outside of the USA where Joel tested it.
Does the Magic Formula also work outside the USA?
You know the Magic Formula works in the USA as Joel proved in his book and on his website.
But does it also work outside the USA?
In 2012 that is exactly what we wanted to find out when we tested the Magic Formula investment strategy in Europe over the 12 year period from June 1999 to June 2011.
This is what we tested
The back-test universe was about 1500 companies in the 17 country Eurozone markets during our 12-year test period (13 June 1999 to 13 June 2011). We excluded banks, insurance companies, investment funds, certain holdings companies, and REITS.
We included bankrupt companies to avoid any survivor bias, and excluded companies with an average 30-day trading volume of less than €10 000. For bankrupt companies, or companies that were taken over, returns were calculated using the last stock market price available before the company was de-listed.
This is what we found:
Magic Formula returns in Europe from June 1999 to June 2011 by company size.
Source: Quantitative Value Investing in Europe: What works for achieving alpha
As you can see companies with the best Magic Formula rank, quintile 1 (Q1) in the above table, did a lot better than companies with the worse rank (Q5).
And it did this for small, medium and large companies.
The best ranked companies all substantially outperformed the market which returned only 30.54% over the same 12 year period.
The best Magic Formula companies did up to 152.3% better than the market.
Others have also tested the Magic Formula outside the USA
A lot of people also wanted to find out if the Magic Formula works in their home market and, not surprisingly, it does.
Here are some other research studies we have come across:
Does the Magic Formula also work in Finland?
It does, and it was proved in 2013 by Topias Kukkasniemi in his 68 page master’s thesis The Use of Systematic Value Strategies in Separating The Winners From The Losers: Evidence From The Finnish Markets at the Lappeenranta University of Technology in Finland.
Topias tested the Magic Formula on the Finnish stock market over the 13 period from May 1997 to May 2010 and found that the strategy does outperform the market.
Does the Magic Formula also work in Belgium, Luxembourg and the Netherlands?
From 1995 to 2014 the Magic Formula definitely worked in Belgium, Luxembourg and the Netherlands as it would have given you an average yearly return of 7.7% better than the market over the 20 year test period, an impressive return.
Click here to start finding your own Magic Formula ideas in India Now!
Here is how you find Magic Formula ideas in India
Now for the interesting part where you can see how to get Magic Formula investment ideas for your portfolio.
We have set it up for you
We have already saved a Magic Formula screen for you so all you have to do is load it.
Here is how you do it:
After loading the screener click the Filter icon then click the Load button as shown below:
Then click on the Predefined filters tab, scroll down and click on the Magic Formula Screen. To load the screen click the Confirm button.
Select India, daily value and company size
You then have to select:
- India
- The minimum Daily trading volume and
- The minimum Market value
of the companies you want to screen for.
To do this click the drop down list item below Countries and check the box next to India.
Next enter the minimum daily trading volume and the minimum market value of the companies you want to screen for. Please note the numbers you enter are in thousands, this means if you enter $125 it is equal to $125,000.
That is all you have to do.
When you are done click the Apply button to get your Indian Magic Formula investment ideas.
How to improve the Magic Formula
As I already mentioned you can improve the returns of the Magic Formula a lot, up to 600.5% in the testing we have done.
We tested the strategy with 13 other ratios and as you can see in the table below the returns of the strategy can be substantially improved.
Click image to enlarge
Magic Formula returns when combined with a third ratio in Europe from June 1999 to June 2011.
Source: Quantitative Value Investing in Europe: What works for achieving alpha
Look at column Q1
Look at the returns in column Q1, it shows the returns generated by first selecting the 20% best Magic Formula companies combined with the ratios in the column called Factor 2.
Best combination +783% was Momentum (600.5% improvement)
This means you could have earned the highest return of 783.3% over the 12 year period if you invested in the best ranked Magic Formula companies that also had the highest 6 month price index (share price momentum).
This is a 600.5% improvement over the best return of 182.8% you could have earned if you used only the Magic Formula to get investment ideas.
Click here to start finding your own Magic Formula ideas Now!
Other great combinations
Other good combinations from the table above are:
- Magic Formula and 12m Price index (momentum) +472.3%
- Magic Formula and Price to Book +460%
- Magic Formula and ERP5 +384.4%
- Magic Formula and 5yr average Earnings Yield (EBIT/EV) +294.8%
How to combine the Magic Formula with other ratios
With the screener it is very easy to combine the Magic Formula with other ratios or indicators.
The following screen shots will show you exactly how.
To start load the Magic Formula saved screen, select the Countries, Daily Trading Volume and minimum Market Value as shown above.
How to add 6 month Price Index (momentum)
To add Price Index 6m (6 months momentum) to the screen click the drop down list below Secondary Factor and, under the heading Momentum click in the Price Index 6 m menu item.
Then move the slider below Price Index 6m so that you select the top 20% or 30% (set the slider to go from 0% to 20% or 30%) of companies with the best six month Price Index.
To get a list of companies click the Apply button.
In the same way you can add:
- 12m Price index (momentum)
- Price to Book
- ERP5
- 5 year average Earnings Yield (EBIT/EV)
Or other good factors you can also use are:
- Free cash Flow yield – to select companies cheap compared to the cash they generate
- Debt to Equity – To select companies with a low amount of debt
- Gross Margin - Novy-Marx (the best quality ratio we have tested)
and many more (you can see all ratios and indicators you can use in the Glossary)
You can save all your screens
Once you have changed the basic Magic Formula screen to fit your investment style you can save it so that you can call it up at any time.
You can save as many screens as you like.
To save your screen click the Save As button.
In the pop-up box give your screen a name and a short description so you can remember what the screen does.
To save the screen click on the Confirm button.
All this costs less than a lunch for two
How much can a tool like this cost, you may be thinking?
To make it affordable, and give you a great return on your investment, even if your portfolio is still small we have made the price of the screener surprisingly low.
It costs less than an inexpensive lunch for two each month (Click here for more information).
Don’t hesitate, you have nothing to lose. If you are not 100% happy you get your money back – guaranteed!
PS: Why not sign up now, while this is fresh in your mind?
Click here to start finding your own Magic Formula ideas Now!
Please note: This website is not associated with Joel Greenblatt and MagicFormulaInvesting.com in any way. Neither Mr Greenblatt nor MagicFormulaInvesting.com has endorsed this website's investment advice, strategy, or products. Investment recommendations on this website are not chosen by Mr. Greenblatt, nor are they based on Mr Greenblatt's proprietary investment model, and are not chosen by MagicFormulaInvesting.com. Magic Formula® is a registered trademark of MagicFormulaInvesting.com, which has no connection to this website.
