30 Magic Formula investment ideas in Asia

Updated on

By Quant Investing

I am sure you have heard of the Magic Formula investing, if not here is a quick summary.

The Magic Formula investing strategy was explained in the excellent book by Joel Greenblatt called “The little book that still beats the market”.

It identifies good quality companies that are trading at an attractive price. And does this by looking for companies with a high earnings yield (companies are undervalued) and a high return on invested capital (ROIC) (quality companies).


Asia Magic Formula companies

As most of the writing on the internet is focused on Magic Formula investing companies in the USA I thought you will be interested in a few Magic Formula investing ideas in Asia.


What the screen looks like

To find Magic Formula investing companies using the screener I did the following:

  • First select the best 20% Magic Formula companies (called MF Rank in the screener).
  • To make sure the companies have high enough volume for you to invest select companies with an average daily traded value of €75,000.
  • Lastly select companies with a market value of more than €50 million.


And I selected only companies registered in the following countries:

  • China
  • Hong Kong
  • Japan
  • South Korea
  • Singapore
  • Malaysia


This is what the completed screen looks like:

Asia_Magic Formula_1
Click image to enlarge
Source: Quant-Investing


Here are the top 15 Magic Formula investing companies the screen came up with:

Asia_Magic Formula_2
Click image to enlarge
Source: Quant-Investing


As you can see lots of Japanese companies with a few South Korean companies in between. I am finding a lot of interesting investment ideas in Japan at the moment.


But the Magic Formula can be substantially improved

But as you may know in the research paper Quantitative Value Investing in Europe: What Works for Achieving Alpha we added 13 other ratios and indicators to the Magic Formula to see if we cannot improve its already excellent investment performance.

What we found was astounding – as you can see in the following table.


Source: Quantitative Value Investing in Europe: What works for achieving alpha


Look at the returns in the Q1 column

In the table the returns you should look at are those in column Q1.

They show the returns generated by first selecting the best Magic Formula companies  and then sorting them by the ratios and indicators in the Factor 2 column.

Best combination +783% was Momentum (a 600.5% improvement on the Magic Formula)

This means you could have earned the highest return of 783.3% over 12 years (June 1999 to June 2011) if you invested in the best ranked Magic Formula companies that also had the highest 6 month price index (price momentum).

Over the same 12 year period mentioned above if you use just the Magic Formula to choose investment ideas you would have earned only 182.8%.

This means if you used both the Magic Formula and 6 months Price index you would have improved your 12 year return by 600.5%.

That is a substantial improvement!


How to add 6 month price index to the Magic Formula

To add momentum to your Magic Formula screen all you have to do is select the 30% of companies with the best 6 month share price momentum (Price Index 6m).

This is what the screen looks like:

Asia_Magic Formula_3
Click image to enlarge
Source: Quant-Investing


Here are the top 15 Magic Formula investing companies with positive momentum the screen came up with:

Asia_Magic Formula_4
Click image to enlarge
Source: Quant-Investing


I hope these screens have given you a few interesting investment ideas to research further.

Wishing you profitable investing

– See more at: http://www.quant-investing.com/blogs/general/2016/11/14/30-magic-formula-investment-ideas-in-asia-(china-japan-hong-kong-south-korea-singapore-and-malaysia)#sthash.e5YXsZrQ.dpuf

Leave a Comment