How to create a simple “magic formula investing” type value weighted index

Let us do this using earnings yield and ROA or ROIC

How to Calculate

 Earnings yield Return on assets ASSUME THE STOCK MARKET HAS ONLY THREE COMPANIES: Company A = 5% 15% Company B = 10% 10% Company C = 15% 5% Total earnings yield of All Companies 30% Total ROA of All Companies 30%
 EARNINGS YIELD WEIGHTING Company A = 5% = 16.7% weight in index 30% Company B = 10% = 33.3% weight in index 30% Company C = 15% = 50 % weight in index 30%
 ROA WEIGHTING Company A = 15% = 50% weight in index 30% Company B = 10% = 33.3% weight in index 30% Company C = 5% = 16.7 % weight in index 30%
 COMBINED WEIGHTING= AVERAGE OF ROA WEIGHTING AND EARNINGS YIELD WEIGHTING Company A= 50%+16.7%/2=33.335% Company B= 33.3%+ 33.3%/2= 33.3% Company C= 16.7%+50%/2=33.335%

You could create your own value weighted index for the largest 100 stocks, Dow, S&P 500, Straits Times Index, BSE Sensex, FTSE100, S&P CNX Nifty index as well.

You can sell all the stocks after a year and buy a new value weighted index the next year.