first year of investing. That means adding 5 to 7 stocks to our portfolio every few months until we reach 20 or 30 stocks

For earnings yield, the formula looks for companies that earn a lot compared to the price we have to pay.

where you invest a relatively small amount of money, earn a reasonable rate of return over time, continually reinvest all the earnings from those investments, and end up with a large amount of money.

Graham’s formula involved purchasing companies whose stock prices were so low that the purchase price was actually lower than the proceeds that would be received from simply shutting down the business and selling off the company’s assets in a fire sale (he called these stocks by various names: bargain issues, net-current-asset stocks, or stocks

The magic formula chooses companies through a ranking system. Those companies that have both a high return on capital and a high earnings yield are the ones that the formula ranks as best. Put more simply, the formula is systematically helping us find above-average companies that we can buy at below-average prices.

You would rather own a business that earns a high return on capital than one that earns a low return on capital! Wax off (or paint the fence or sand something or whatever)!3

For taxable accounts, we will want to adjust that slightly. For individual stocks in which we are showing a loss from our initial purchase price, we will want to sell a few days before our one-year holding period is up. For those stocks with a gain, we will want to sell a day or two after the one-year period is up. In that way, all of our gains

high earnings yield means that the formula will buy only those companies that earn a lot compared to the price we are paying.

as stocks in our portfolio reach the one-year holding mark, we will replace only the 5 to 7 stocks that have been held for one year.