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Magic Formula Data


west
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As I mentioned in another thread (the Benjamin Graham Screen one?), I've been collecting Magic Formula data for about 2 years now.  You can find it here:

 

www.dusthimer.net/MF_DATA

 

In summary:

- It does work!  (For the most part... at least what I've seen so far)

- I've seen a lot of churn in what does and does not show up in the $50m minimum market cap category.  For example, there used to be a lot of Chinese fraud companies (that *destroyed* performance).  Suspiciously, now they've disappeared.  This leads me to believe what's posted on the website gets edited to a certain degree.

- If I was going to invest using it today, I would go for the 50 companies, $5000m minimum market cap group.  This seems to perform the most reliably, and gives pretty good returns from what I've seen so far.

 

west

 

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Let's say you're a beginner investor with a small portfolio.. say $10K.  How would you go about using this? It's a bit unrealistic to buy 50 $200 positions (transaction fees alone would be a bit hit).

 

Just buy 10 and expect more variability in your results. Risk as defined by beta will be higher but risk as defined by long term performance should stay the same.

 

BeerBaron

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Let's say you're a beginner investor with a small portfolio.. say $10K.  How would you go about using this? It's a bit unrealistic to buy 50 $200 positions (transaction fees alone would be a bit hit).

 

Just buy 10 and expect more variability in your results. Risk as defined by beta will be higher but risk as defined by long term performance should stay the same.

 

BeerBaron

 

Wouldn't try that with the small caps tho. Chances are you get a bad run for two or three years with a couple of zero's, making it very hard to come back. Diversification doesn't seem an option here but a must.

 

I'm also not sure whether a beginner should try this. Magic Formula investing has the name of being very hard for most people. You really need the right temperament. Most people can't stand a 30-40% drop in their portfolio and are very likely to screw up their basket of magic stocks. I would try to find out whether I have the right temperament first if I were a complete novice.

 

I personally consider trying it once I have $50,000 to spare for a separate portfolio. Would want a net worth in stocks of at least another $150,000. Only then can you easily ignore what those 25/50 stocks are doing. Wouldn't like the idea of those stocks being my only exposure to the market as it increases the risk of doing dumb things.

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mysticdrew,

 

I would *not* just pick a small basket of companies from the set and invest in them.  I've seen a couple of sets where the 30 company data set loses to the market, but the 50 company data set blows it out of the water.  And, if you look at the individual returns of companies, they vary wildly.  So diversification is *key* here.

 

If you're dealing with $10k, I think it's probably best to avoid using the Magic Formula for now.  Really, because of transaction costs, you need around $100k - $200k to be at the point where MF investing beats the market by enough to make up for transaction costs/taxes, if you're dealing with the 50 company data set.  At least from what I've seen so far.

 

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Ah, I missed tombgrt's post.  I think he is dead on with his "I personally [would] consider trying it once I have $50,000 to spare for a separate portfolio" comment.

 

For what it's worth, I have not been investing in it myself.  I've just been collecting data.

 

 

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While not a perfect substitute, you could always use the funds.

 

 

http://www.formulainvestingfunds.com/

 

Last I checked, their funds had positive returns, but not nearly as good as the screens would predict from their back testing as is always the case because of transaction costs, etc.

 

What is interesting is to watch what falls into their lists and cherry pick the rare great company. That has worked very well.  :)

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The strategy is now underperforming since it's been in actual practice.

 

May 1, 2009 through September 30, 2012

 

http://www.formulainvesting.com/Results/US_Strategy/

 

Well, the data seems to be net of fees and based on actual accounts (where IIRC investors might pick and choose the 'best' of the MF - could be wrong on this point).  As a result, it's not indicative of the strategy itself. 

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The strategy is now underperforming since it's been in actual practice.

 

May 1, 2009 through September 30, 2012

 

http://www.formulainvesting.com/Results/US_Strategy/

 

Well, the data seems to be net of fees and based on actual accounts (where IIRC investors might pick and choose the 'best' of the MF - could be wrong on this point).  As a result, it's not indicative of the strategy itself.

 

I don't think you are supposed to select from the stocks, just get enough for diversification, as I recall from the book.

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The strategy is now underperforming since it's been in actual practice.

 

May 1, 2009 through September 30, 2012

 

http://www.formulainvesting.com/Results/US_Strategy/

 

Well, the data seems to be net of fees and based on actual accounts (where IIRC investors might pick and choose the 'best' of the MF - could be wrong on this point).  As a result, it's not indicative of the strategy itself.

 

I don't think you are supposed to select from the stocks, just get enough for diversification, as I recall from the book.

 

True, but evidently many people pick and choose.  They have an interesting discussion somewhere that indicates the picking has reduced returns on average.

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Mr. Frog,

 

That's not what I've found, at least for the periods that I've collected data.

 

Oddly, the Minimum Market Cap of $5b, 50 company dataset seems to perform the most reliably, with the least amount of volatility, and with the fewest amount of "torpedo" stocks.

 

Fwiw, I'm still not 100% convinced I would use the Magic Formula blindly quite yet though.  It's promising, but I must collect more data! :)

 

(And, again fwiw, I'd like to be able to reliably reproduce the list on the website using my own code.  If I can't do this, there may be more Greenblatt tampering going on with the website list than I'd care for.)

 

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according to that site it holds 24 stocks - that should get you pretty close to the results in the book, right?

 

"The strategy generally holds 24 mid to large market capitalization stocks."

 

I've been giving the professionally-managed account a try for the last two years. It has generally held 30 stocks during that time, and has underperformed substantially: total returns +24% for the S&P, +4% for my account. By reporting only the average performance they're not giving the full picture. It would be more informative if they'd publish some measure of the range of results seen in the individual accounts.

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I encourage anyone considering following the Magic Formula to carefully read through Marsh Gerda's blog, MFI Diary.  It's at http://justadrone.blogspot.com/

 

He is an actuary and has been meticulously creating monthly tracking portfolios based strictly on the MF along with some portfolios of his own making with various approaches .  I will summarize that the results have been dismal.  He has all but given up in his own portfolio though he is trying a dividend approach now.  You can ignore his various approaches and simply review the standard monthly tracking portfolios.  Every so often he has a post that details the performance of all the tracking portfolios since inception (around the time of the book).  You will need to search through to find one of those posts.

 

I admire Joel Greenblatt and loved "You Can Be a Stock Market Genius".  I was prepared to believe in the Magic Formula because the philosophy fits my view of what works, but I absolutely no longer think it works, but check out Marsh's blog and see what you think.

 

I won't argue either way, but simply encourage that you check out Marsh's work before you commit real money to this strategy.

 

Mike

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I encourage anyone considering following the Magic Formula to carefully read through Marsh Gerda's blog, MFI Diary.  It's at http://justadrone.blogspot.com/

 

He is an actuary and has been meticulously creating monthly tracking portfolios based strictly on the MF along with some portfolios of his own making with various approaches .  I will summarize that the results have been dismal.  He has all but given up in his own portfolio though he is trying a dividend approach now.  You can ignore his various approaches and simply review the standard monthly tracking portfolios.  Every so often he has a post that details the performance of all the tracking portfolios since inception (around the time of the book).  You will need to search through to find one of those posts.

 

I admire Joel Greenblatt and loved "You Can Be a Stock Market Genius".  I was prepared to believe in the Magic Formula because the philosophy fits my view of what works, but I absolutely no longer think it works, but check out Marsh's blog and see what you think.

 

I won't argue either way, but simply encourage that you check out Marsh's work before you commit real money to this strategy.

 

Mike

 

 

 

I think the frauds that show up on this screen in recent years drag down the results.  The screen is useful because a wonderful company will occasionally show up on it.  We had a very nice three bagger a few years ago that was a great company that took a V shaped dive and went right back up after we bought it. 

 

We also bought a net net that was not a reverse merger fraud, but a real business in the tech field that had a good product that unfortunately was losing its edge.  It was company with tentacles that reached back to Taiwan, not ROC.  It never bounced.  Eventually, they did a deal with a Taiwan affiliate that stripped out all the economic value.  That left US shareholders holding an empty bag with little or no legal recourse.

 

In summary, buyer beware with MFI stocks.

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I have held a portfolio tracking the Magic Formula stocks for 5 years.  in the end the results were quite similar to the S&P 500, but with huge volatility.  Just to give an idea: the first 8 month the underperformance was 16%!  So, all in all, I am not convinced.  5 years is statistically significant and although Magic Formula probably outperformed 70% of the time, 2 short periods of significant underperformance made it an average investing strategy.

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I have held a portfolio tracking the Magic Formula stocks for 5 years.  in the end the results were quite similar to the S&P 500, but with huge volatility.  Just to give an idea: the first 8 month the underperformance was 16%!  So, all in all, I am not convinced.  5 years is statistically significant and although Magic Formula probably outperformed 70% of the time, 2 short periods of significant underperformance made it an average investing strategy.

 

I've had a small amt in the Magic Formula since fall of 2007 (mainly for data collection/curiosity).  You're correct that its about mirrored the SP500, with more volatility.  However I think that 5 years being statistically significant is tougher to show.  My results have outperformed many value managers i respect.  From 2008 - 2010 i would've been right around einhorns results based on this:

 

http://www.gurufocus.com/news/123492/which-gurus-had-positive-returns-from-2008-to-2010

 

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