how to invest properly in the stock market
Introduction
# The investor who created this formula has even said that if we invest according to this formula, then no one can stop us from making a lot of money in the stock market. how to invest in stock market for beginners
What is the magic formula in the stock market?
This formula of investing has been created by Joel Greenblat, one of the best investors in America. He first talked about it in his book The Little Book That Beats the Market and speaks
#Big profits are made in the stock market only when we invest in the best companies when they are available to us at a cheap price because when we buy good companies at a cheap price then their price increases in the future which then gives us profit. We can easily buy good companies at a cheap price. For this, Jal Green Balt has created a formula which he calls Magic Formula Phoolan. He says that
# He named this formula Magic Formula because it works like magic, and he has made it so easy that even small children can use it easily. Friends, Magic Formula is basically a ranking formula which gives us a rank wise list of such companies by using two financial ratios which are good as well as available at a cheap price and then we can easily invest in the best ranked companies. Friends, the ratios used in the Magic Formula are: There are two financial ratios RO i.e. Return on Capital Employed and P Ratio i.e. Price to Earnings Ratio. RO means how much percent return the company is making on the total capital employed and PE Ratio tells how much money investors are paying for ₹1 profit made by the company today.
Example
If the RO of a company is 15, it means that the company is making a return of 15% per annum on the total capital invested in its business. Whereas, if the P ratio of a company is 20, it means that investors are coming to that company for Rs. 1 profit.
How Does Magic Formula Work?
In the magic formula, first of all we rank the companies according to their RO, that is, the company with the highest RO will be given rank one, then the company with lesser RO will be given rank two and, in this way, we will rank all the companies from high to low RO.
After ranking by RO, we will rank the same companies according to their P ratio, but in P ratio we will give number one rank to the company whose P ratio is the lowest and then the companies with higher P ratio will be given rank two and, in this way, we will rank all the companies from low to high P ratio
# After doing this, we will now add the ranks of RO and P ratio of all companies and create a combined rank which we will call magic formula rank. For example, if the RO rank of a company is three and its P ratio rank is five, then the magic formula rank of the company will be 3+5 i.e. 8. Similarly, after finding the magic formula rank of all companies, we will get the magic list of companies in which we have to invest. We have to invest in only those companies from this magic formula rank whose magic formula rank is the lowest.
# For example, if the magic formula rank of one company is seven and the magic formula rank of the other company is five and if we have to invest in one of the two companies, then we will invest only in the company with rank five.
Example 
Let's assume that we want to invest in five companies out of these 20 companies. To select companies with the magic formula, we first have to rank these companies according to their ROC. Let's assume that we ranked all the companies according to ROC, which is like this: Among all these companies, ST Limited had the highest ROC, so we have given it rank one. After that, N Limited had the lowest ROC, which we have given rank two. Then MN Limited has the lowest ROC, and similarly, HJ Limited has the lowest ROC, which we have given rank 20. Now friends, we have to rank all the companies on their P ratio as well.
#Let us assume that the rank of these companies according to P ratio is something like this. The lowest P ratio is of QR Limited, so we have given it rank one. After that, the highest P ratio is of Peak Limited, which we have given rank two. Then the highest P ratio is of D Limited, which we have given rank 20.
#Friends, we have ranked all the companies according to their RO and P ratio. Now let us add both these ranks of all these companies, which will give us its magic formula rank. So, after adding both the ranks of all the companies, we got their magic formula rank like this. Here, the lowest rank is of PQ Limited, whose magic formula rank is nine. Then the highest rank is of QR Limited, whose magic formula rank is 11. Then ST Limited has magic formula rank 12. And similarly, at the end is CD Limited, whose magic formula rank is 34 If we were to rank these companies again according to their magic formula rank, it would look like this
#Now if we have to invest in five of these companies then we will invest in the top five companies whose magic formula rank is the lowest whereas if we have to invest in only three companies then we will invest in the top three companies whose magic formula rank is the lowest.
# The strategy of investing with magic formula is a little different. In this we have to hold the companies for only 1 year and after 1 year we have to sell the companies of the previous year and then select new companies from the magic formula rank which we have to sell again after 1 year and we do this process every year.
# Joel Green blood says that Magic Formula is a strategy in which we get maximum success when we keep doing it continuously for at least 5 years. He also says that we should make a portfolio of 20 to 30 stocks in this strategy, but he does not advise us to buy so many companies at once. He says that in this strategy, we should invest in five to seven companies every three months in the first year. By doing this for a year, our portfolio will become of 20 to 30 stocks. Then the five to seven stocks that we bought for the first time should be sold after one year and then we should buy five to seven new stocks with the Magic Formula strategy, and we have to keep doing this every three months, i.e. we have to sell the stocks bought 1 year ago and buy new stocks. If we keep doing this for 5 years, then our return will be much more than the average return of the stock market.
What is the secret behind the magic?
This question must be coming in your mind that how is it possible that we can earn money easily in the stock market by following a simple formula, whereas many intelligent people suffer losses in the stock market. What is the matter?
# The simple answer to this formula is that the magic formula is a formula that demands time from us and most people, no matter how intelligent they are, are unable to show patience in the stock market and due to this reason, they are unable to make big profits in it.
# The truth is that the magic formula does not give us good returns every year. It is possible that we may incur losses in many years. But the creator of this formula, Joel Greenblatt, says that this formula gives us good returns only when we follow it with complete discipline for years. Most people give up in two to three years and they leave the magic formula. But Joel Greenblatt says that to get good returns from this formula, we should follow it for at least 5 years. # In our example, we applied the magic formula on 20 imaginary companies, but in the stock market, we have to apply the magic formula on at least 200 biggest companies every time, only then we will be able to use the magic formula properly. how can I invest in stock market
