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New Joel Greenblatt Book?


merkhet
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Funny, just browsing this at b&n

 

Rank stocks on 1) earnings yield and 2) return on equity.

 

Ranking of 1 is highest.

 

Add both rankings together, take top lowest scores (I believe 30 stocks)

 

Can anyone do this quickly and post some names?

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Dcg, you may be right.  I was just curious if you ran the screen today if there are any interesting ideas we could talk about on the board.

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I read the magic formula about a year ago.And I am still curious about the performance of magic formula since then. Maybe,i can ask an expert around here.

 

Does it exclude the bankruptcy or delisting companies in the backtest ? I read the abstract of academic research which using the same formula in Thai stock market(as I am Thai).The full version is not published yet. The backtest result back in last 13 years in thai stock market has made 1000x gain(not 1000%). But it is impractical because most stocks falls into these formula are very illiquid and i am sure that the researcher didn't include bankrupties or delisted stock in the data. If its backtest didn't include the black swan,it is some kind of the survivor bias.

 

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I've used the magic formula since Nov 2007.  My performance on an absolute basis is 18.29% vs -7.29% (sp500 including dividends).  I believe over multiyear periods it should work well.  However there were times were it underperformed or barely beat the market (1995-1999 was one such period).

 

Also, i have done quite a bit of studying on the magic formula.  Interesting observation is that from 2005 to present, large cap (over $1 Billion) Magic formula stocks have outperformed the small cap screen (which included all companies over $50 million).  However, since 1988, the over 50mil screen has outperformed.

 

As far as the 1 year holding period, it may make more sense that you think.  in 1976 Graham advocated using a similiar stock screen and rebalancing every 1 or 2 years.  he said that this screen would have produced similiar returns to his partnership over the past 50 years (ending 1976). 

 

Quite frankly, the magic formula has beaten many respected value managers over the past 10, 20 years).  It remains to be sees how it will perform since the book was published (in 2006), but so far it is performing alright.

 

 

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I'm currently holding 22.  I usually pick 6 or 7 stocks, once a quarter and hold for a year (per book instructions).  Sometimes however I'll buy a stock that i already own because it is still a Magic Formula Stock.  so usually holding around 20-28 stocks.

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Does it exclude the bankruptcy or delisting companies in the backtest ? I read the abstract of academic research which using the same formula in Thai stock market(as I am Thai).The full version is not published yet. The backtest result back in last 13 years in thai stock market has made 1000x gain(not 1000%). But it is impractical because most stocks falls into these formula are very illiquid and i am sure that the researcher didn't include bankrupties or delisted stock in the data. If its backtest didn't include the black swan,it is some kind of the survivor bias.

 

Greenblatt's data (according to him) does not have a survivorship bias.  The 100,000% return in the Thai market does strain credulity, but if factoring in illiquid companies, etc. and survivorship bias knocks of 2 orders of magnitude of gain(100X), it still would be pretty impressive.  As a general rule, these mechanical value screens have done very well in most markets.  If you look at the Tweedy Browne study, these sorts of value screens tend to do better in markets like Thailand rather than say the US or the UK.

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I've used the magic formula since Nov 2007.  My performance on an absolute basis is 18.29% vs -7.29% (sp500 including dividends).  I believe over multiyear periods it should work well.  However there were times were it underperformed or barely beat the market (1995-1999 was one such period).

 

Also, i have done quite a bit of studying on the magic formula.  Interesting observation is that from 2005 to present, large cap (over $1 Billion) Magic formula stocks have outperformed the small cap screen (which included all companies over $50 million).  However, since 1988, the over 50mil screen has outperformed.

 

As far as the 1 year holding period, it may make more sense that you think.  in 1976 Graham advocated using a similiar stock screen and rebalancing every 1 or 2 years.  he said that this screen would have produced similiar returns to his partnership over the past 50 years (ending 1976). 

 

Quite frankly, the magic formula has beaten many respected value managers over the past 10, 20 years).  It remains to be sees how it will perform since the book was published (in 2006), but so far it is performing alright.

 

 

 

The problem is capital gains tax. The formula has you selling everything eery year, opposed to being taxed after compounding returns.

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King,

 

Thanks for the reference.  

 

I wonder how badly survivorship skews the result.  Just by approximation, if 20% of the stocks in the sample had gone bust per year, you still get a compounded growth of 48%.  

 

The professor does make an error in saying that Greenblatt uses P/E (he doesn't) but nevertheless what is important to me is the outperformance of value investing generally and in particular the out performance of a Greenblatt "style" screen.  The modified magic formula really crushes the market in general and even the low p/b, low pe, 3% dividend screen.  66% returns per year wow!!  Makes me want to move to Thailand.

 

Out of curiosity, what is the level of financial disclosure in Thai stock markets?

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Netnet,

The financial disclosures for listed companies in Thai market are moderate to high. Company has to do a FS in quarterly basis. In Hong Kong market, listed companies are just required to send FS in half-year basis only. But in Asian companies including in Thailand or other countries, I think we have a lot of related-transaction. For example, the major supplier might be owned by CEO.Something like that. 

 

The magic formula or value screen formula perform well in small stock market might because

1. Less institutional investors.

2. Most stocks are cyclical in commodities industry.No real moat.Very few growth stock that can grow its revenue every year without large cap-ex.

 

To sum up , in small market. Stocks are more volatile in both market valuation (due to less institutional investors) and its business strength .That makes the fundamental-based formulas outperform market substantially .

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