MagicDiligence Frequently Asked Questions
Welcome! This page will get you started using the service, and is a good reference to come back to later for questions. Before getting into the details, let's first go over what you need before buying the first MagicDiligence stock:
MagicDiligence uses the Magic Formula® Investing (MFI) strategy and its teachings as the basis for finding attractive investment opportunities. To understand the theory behind the strategy, do yourself a favor and spend $15 and 2 hours reading Joel Greenblatt's excellent book. Since most have probably already read the book, let's move on...
Get a low or no-cost brokerage account.
The Magic Formula® is a farily high turnover strategy, and brokerage commission costs can significantly affect overall returns. MagicDiligence recommends finding a good, low-cost brokerage to implement MFI.
What are Top Buys?
The basic premise of MagicDiligence is to use the official Magic Formula® screen and other similar screens to find a "universe" of potentially attractive stocks. Then, we apply equity analysis to find the ones that are truly great companies with growth potential, competitive advantages, and strong financial health. By finding these and weeding out the not-so-great companies in the screens, we aim to limit the losers while maximizing the winners, beating the market in the process.
Which Screens are Used?
MagicDiligence uses three "tiers" of stock screens to build its universe of potential picks. The first "tier" consists of the official Magic Formula® Investing (MFI) website's screens. Any combination of minimum market cap and number of stocks is fair game. The second "tier" consists of stocks in MagicDiligence's Pre-Created screens, which are re-generated daily and designed very similar to MFI. The final "tier" are stocks from a third party screen which uses similar criteria to MFI.
The third party screen used is generated from TD Ameritrade's screener and consists of the following criteria:
- Return on Equity >= 20%: This mimics the return-on-capital requirement of MFI.
- P/E between 2 and 12: Mimics the earnings yield requirement of MFI. Limiting the low end to 2 helps weed out potential frauds and other anomalies. The top end of 12 is a historically low multiple.
- Current price > $2: Another guard against garbage entries.
- Sector and Industry: This filters out Financials and Utilities, just like MFI.
When Should I Buy and Sell?
Each Top Buy pick contains a "Buy Under" and a "Sell Early" price. The "Sell Early" price represents a price at which MagicDiligence feels the stock will be fully valued and, as such has limited remaining upside. MagicDiligence will sell any Top Buy pick exceeding its Sell Early price.
Conversely, the "Buy Under" price represents a price at which MagicDiligence believes there is a significant margin-of-safety at which investors can consider buying the stock.
Finally, MagicDiligence will review each Top Buy pick after 1 year of holding. At this point the stock may be renewed for another year (if a significant margin of safety remains), or sold to raise capital for more attractive opportunities.
How Do I Use the Other Stock Reviews?
Not all members will buy just the stocks recommended by MagicDiligence. The service provides research notes and recommendations on other Magic Formula®-like stocks. This is purely for informational purposes. These stocks will not be actively followed, and are not listed on the Picks page.
What if a Top Buy Remains after One Year?
MagicDiligence will review each Top Buy pick after 1 year of holding. At this point the stock may be renewed for another year (if a significant margin of safety remains), or sold to raise capital for more attractive opportunities.
If a previous recommendation is renewed for another year, there will be no new recommendation for that bi-weekly period, as the goal is to keep the MD portfolio to 26-30 stocks. However, MagicDiligence will never renew previous picks in 2 consecutive bi-weekly periods without also providing a new stock recommendation.
What is the Billing Policy? How do I Cancel?
Billing is performed on a monthly basis. The cycle begins on the date of sign-up and is renewed automatically in every subsequent month if not cancelled.
Joel Greenblatt and MagicFormulaInvesting.com are not associated in any way with this website. Neither Mr. Greenblatt or MagicFormulaInvesting.com endorse this website's investment opinions, 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. The information on this website is for informational purposes only and solely represents the views and opinions of the author. No warranty is provided or implied as to the accuracy, completeness, or timeliness of this information. This information may not be construed as investment advice of any kind, nor can it be relied upon as the basis for stock trades. The proprietor of this website is not responsible in any way for losses or damages resulting from the use of this information. Alexander Online Properties is not a registered investment advisor. All logos are trademarked properties of their respective companies.
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