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Magic Formula

Magic Formula –

Is Value Investing a Simple Formula?

Without a sound investment philosophy, outperforming the markets over the long haul is virtually impossible. A formula is a tool to adhere to an investment philosophy. The philosophy Ben Graham taught his disciples was simple:

  • Owning a stock represents an ownership share of a business and all the rights associated with ownership.
  • The market is often times irrational due to fear and greed. This presents attractive buying opportunities.
  • Only buy businesses selling for less than their intrinsic value – margin of safety.

A simple formula emerged; buy pieces of businesses at less than their intrinsic value, regardless of market sentiment. While the value greats differed in their search and sale strategies, they all followed this simple formula. Each consistently bought businesses at prices well below their conservative assessment of intrinsic value. Some investments worked out well and others did not but they never deviated from this formula. They simply repeated it over and over again.

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