InvestorQ : Are there any magic formulas that are used in practice?
Aashna Tripathi made post

Are there any magic formulas that are used in practice?

natasha Samani answered.
3 years ago

Dividend yield is a common magic formula. Normally, for stable companies with low growth, dividend yield of 4% and above is attractive. For high growth companies, a dividend yield of 2% may be attractive. Investing based on the dividend formula works consistently in case of quality companies. Of course, this is more for the conservative investors.

Buying quality managements on dips is also quite a common magic formula. It works beautifully in case of FMCG and pharma stocks. This works despite high P/Es. Typical cases are stocks like Asian Paints, Sun Pharma, and Colgate etc. Buying them after a 25% correction may invariably be accretive for you!

P/E based churn is another magic formula that has worked for many traders and investors. Getting into quality stocks closer to the lower P/E band and exiting closer to the higher P/E band works for many investors. It also makes economic sense as it is a liquidity neutral strategy. This can also be formula based in your situation.

Quant based approach has again worked for a select few who know how exactly to apply the same. Automated strategies based on technicals, charts, trends, derivatives data all capture short term trends and turnaround situations to perfection. This approach may not be meaningful to all investors.

Macro play on cyclical stocks is again a strategy that works. Going long on cyclical stocks in a macro uptrend and long on defensives in a macro downtrend is not only logical but works over longer periods of time. Better to avoid this as a short term strategy, as it works better over longer holding periods only.

Lastly, there is the “Next Big Story” formula. Big money is made by betting on the next big story. Tech, pharma, MNC and Consumer discretionary were all big trends at some point. But the gestation may be too long and the success ratio can be quite low. This formula calls for deep understanding and patience.