Joel Greenblatt is the managing principal and co-chief investment officer of Gotham Asset Management . He is often credited with the creation of the popular Magic Formula .
Anyone who believes that investing in stock markets is simply a game of opinions and emotions is likely to fail miserably.Investing in stock markets can be rewarding, but only if you make conscious decisions.Today, we will discuss the views of an investor who took these deliberate efforts and mapped out a path to success in the stock market, led by Joel Greenblatt, the creator of the magic formula.He is the managing principal and co-chief investment officer of Gotham Asset Management, a global investment management firm.
He is often credited with the creation of the popular Magic Formula.His popular strategy involves purchasing undervalued stocks based on two things: high cash flow and return on investment (RoCE).Here are some of his famous sayings.#1 It's like going through a dynamite factory with a burning torch.You may live, but you're still an entrepreneur. When you are investing in the stock market, you should be specific about your ultimate investment goals.You should clearly decide whether you want small but regular gains or large, irregular gains.An investor who does not know what his ultimate goals are are is like going to a restaurant and saying I want one plate of rice without really specifying what dish you want.Being vague on the stock market can be dangerous.Given that you do not have a single aim but only one goal: make a lot more money.What an average investor would do is to choose stocks with a promising future. PSU stocks will continue to give regular dividends, but the return will be lagged here.Blue-chip firms will make sure you don't lose much, but they will cost you a lot more money.Smallcap stocks may rise quickly, but at a faster rate, according to Joseph, but that doesnt mean that it's the right thing to do.#2 On the other hand, if you have a hard time deciding what you want in stocks, you can end up losing money. Human beings are apt to respond quickly in the event of negative outcomes.Share markets are dynamic and volatile.They are constantly evolving due to various forces beyond human intervention.So even the stocks that are profitable for the long-term might fall in the near future.In these days, the long-term investor keeps looking at the share price constantly, or is looking at other stocks, or is monitoring the future, and ends up selling a good stock at a discount price.Otherwise, he may have been a crorepati if he had done nothing in that situation and just trusted his investigated stock. It was the joke on social media platforms.But those that stayed calm and did nothing were able to post decent returns at a time when the bluest of bluechips fell.Long-term investing is similar to cooking rice with a closed lid.After taking in the correct amount of water and setting on the grill, take a step back and watch the flame begin to heat. If he senses something burning, he should act immediately.The key takeaway is that one must be able to distinguish between problems that are temporary in nature and ones that are long-term.People are often quick to respond to inadvertent obstacles, selling in panic.It shouldn't be the case. The values of the underlying companies have not changed drastically during the same period.The above quote is particularly relevant for recent market dynamics.Money moved into the share markets in 2021 as a result of lockouts and increased liquidity, as people move the local trains in the financial capital city.In the process, the share prices of so many companies were skyrocketing.It was like falling asleep one night and awakening as a millionaire. On April 7, 2021, a stock was listed at Rs 140, and the same stock was reported to Rs 9,928 on December 2021.It's a hefty increase of 6,654%!That too in such a short period.If you're wondering if this is a penny stock, you'd be wrong!EKI Energy was criticized by cryptos for their performance in early 2022.EKI Energy's marketcap has eroded at least 45% year on year, with tightening liquidity, geopolitical instability, and supply chain disruptions taking a toll on the market. The share price can fluctuate mainly due to market sentiments, but doing something logical and systematic will pay dividends over time.The market eventually gets it right.As we mentioned earlier, it can be market sentiments that cause the stock price to fluctuate.When something bad or wonderful happens to us, our emotions are all over the place.When we are emotional, we often make the wrong choice.When markets are emotional, stocks behave in a wayward manner. After the market's emotions subside, the share price will either rise or fall to come close to its original value.Consider Zomato's IPO.Valuation guru Aswath Damodaran predicted that the stock's price band should be extremely high when using valuation and relevant metrics.Zomatos stock price should not exceed Rs 44.Today, it is well known for its discounts and marketing strategies. As the month progressed, shares were listed at a much higher price.The stock price did however drop rapidly and fell to Rs 44!At the exact fair value calculated by Ashwath Damodaran.The share price was steady for a while, but it ultimately came down to the stock's fundamentals.So, when evaluating a stock, keep in mind the basics and make decisions accordingly without worrying about the market mood. #5 The secret to successful investing is to figure out the value of something and then spend a lot less.In share markets, two questions are asked: 1.How to choose the right stocks.2. Is it a safe stock?A good stock with solid fundamentals, good future prospects, solid previous results, high ROE, promoter support, etc.is a good stock.It's a difficult job. Nonetheless, this is just work half done.Even after completing the monumental task, an investor will tell you that your career is not over.You have to answer one more question.2.Is it a good time to buy the stock? So, the real secret is to wait.To buy the stock at the right time.Market emotion does not always favor the investor.The market mood pushes the value of a good stock down, which in turn provides buying opportunities.The point is simple: it is not the execution of these questions that makes them work, so be careful there too. Key Takeaway: Avoid overpaying and conducting thorough research.Your returns will depend on how well you stick to these rules.No matter what the stock market is doing, failing to follow these guidelines will almost always lead to poor returns.Joel Greenblatts magic formula scheme may not be right for you, and that is fine. It will help you to put individual stocks in their proper context.Following these guidelines will surely help you in your quest to get rich slowly and steadily without taking too much of a risk.It is not a stock pick and should not be taken as such.(This video is a supplemental version of Equitymaster.com.