Highlights
- Popular strategy developed by Joel GreenBlatt, one of the popular fund managers . His popular book "The Little book which beats the Market" is a good read for further understanding of this concept.
- Stocks for investment are selected based on two important parameters, Price Earnings Ratio (PE Ratio) and Return on Capital Employed (ROCE)
- In general lower PE Ratio stocks are considered good for investments , similarly higher ROCE stocks are considered good for investments
- Concept is to strike a balance between PE Ratio and ROCE by assigning consolidated ranking to the stocks and pick the value stocks
- Suitable for investing in medium and long term basis
- Useful for Tax harvesting
Analysis to pick value stocks
- From any reliable screener website , download the complete list of stocks with PE ratio and ROCE values and export to a CSV or Excel sheet
- This formula works well for non banking stocks as in banking stocks profits earning calculation method is different . Hence , banking and finance related stocks dealing with loans may be excluded from list
- Add a new column "PE Rank" , sort the stocks based on PE in ascending order . In PE Rank column assign ranking starting from value 1 .
- Add a new column "ROCE Rank" , sort the stocks based on PE in descending order . In PE Rank column assign ranking starting from value 1 .
- Add a new column "Final Rank" , Add up PE Rank and ROCE rank and then sort the final rank in ascending order
- Top stocks in this sorted list are considered as value stocks which strike a balance with good PE Ratio and ROCE
How to Invest for maximum returns
- Divide the investment capital into 6 parts . Say for example if Rs.120000 , then 20K * 6 installments
- Invest each installment during alternate months i.e say April then June,Aug and so on. So that in a year all 6 installments get invested
- During each investment , invest equally in the top 5 stocks from the analysis ranking sheet. Say 20K installment , divide into 4K and invest in top 5 stocks
- This will result in total about 5 * 6 = 30 stocks by end of 1 year in investment portfolio
- During each investment on alternate month , the analysis ranking sheet to be recalculated , new top stocks from list to be selected and invested
- At the end of 1st year , the first installment stocks irrespective of returns accumulated to be sold and new value stocks to picked and invested
- In this way investment in value stocks get rotated and returns are balanced.
- For Tax harvesting , just before a week of end of financial year - loss making stocks may be sold instead of the start of new financial year.
- Good returns may be expected during the 2nd and 3rd year of investment cycle