Magic Formula Data

[CorpRaider]

Just an update for the professional products. Overall, not too pretty.

 

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

 

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

 

And mutual funds:

 

http://quotes.morningstar.com/fund/fnaax/f?t=FNAAX

 

http://quotes.morningstar.com/fund/fnvax/f?t=FNVAX

 

http://quotes.morningstar.com/fund/fnsax/f?t=FNSAX

 

http://quotes.morningstar.com/fund/fvvax/f?t=FVVAX

 

This is 3 year data, hardly statistically valid. In fact given the tumult, I would expect something like this during this period.  That said, to me MF is a beginning, it gives companies to analyze.

 

Whenever I hear this response I wonder how long is needed for something to be statistically significant?  I've heard people claim 120 years of market data isn't enough to show stocks outperform bonds at a statistically significant level.

 

At the minimum, you need to go a whole market cycle.  Also, I would guess, that the Chinese fraud problem really screwed up results.  No experienced investor should have bought into that crap, though. Again, I look at MF  as a starting point.

• If you scrub for the Chinese frauds, and the results were good, one could still argue that that was cherry picking.
  
• You would expect value stocks not to do as well on a big leg up in the market.
  

I think that's certainly a form of cherry picking. Magic formula is supposed to be great because it's buying ugly and cheap companies that humans wouldn't buy because "no experienced investor should have bought into that crap". If it would have bought a few real Chinese companies that went op 1000% no-one would have complained about the bad picks, in that case it would all be part of the strategy.

 

I must be missing something, it looks to me like my FNSAX is pantsing S&P and Midcaps.    http://quotes.morningstar.com/fund/fnsax/f?t=FNSAX

[CorpRaider]

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

 

Thanks for the head's up on the blog.

[Guest]

Nothing ground breaking but a little worthwhile for those who use the magic formula:

 

http://www.valuewalk.com/2014/03/applying-greenblatts-magic-formula-approach-practice/

[bsned2]

So clearly the data for users on this website (and others) suggest the Magic Formula doesn't work, or at best beats the market slightly.

 

But he purports to have data showing that it has worked like gangbusters for the last 10, 15, 20 years?

 

I don't get it.  Is he fudging the data somehow?

 

(Anyway I just read his "little book" and found it "little useful."  And I'm just a beginner!

[peter1234]

It does 'work', just not as well as in the book.

 

He never disclosed the 'exact' formula.

 

There are lots of people that did backtesting on it.

 

One thing to note is that it is not a typical value strategy protecting on the downside as the drawdowns are vicious. If you can hold on to the portfolio, it should outperform the market.

 

As a screen to generate ideas, it is pretty nice.

 

His other books 'The little book that beats the market' and 'Genius' are better.

:)

[Guest]

It does 'work', just not as well as in the book.

 

He never disclosed the 'exact' formula.

 

There are lots of people that did backtesting on it.

 

One thing to note is that it is not a typical value strategy protecting on the downside as the drawdowns are vicious. If you can hold on to the portfolio, it should outperform the market.

 

As a screen to generate ideas, it is pretty nice.

 

His other books 'The little book that beats the market' and 'Genius' are better.

:)

 

The magic formula is from "The Little Book that Beats the Market." Are you referring to the "Big Secret for the Small Investor?" That one basically talks about equal weighted index funds (with an added emphasis on value characteristics) from what I remember.

[peter1234]

It does 'work', just not as well as in the book.

 

He never disclosed the 'exact' formula.

 

There are lots of people that did backtesting on it.

 

One thing to note is that it is not a typical value strategy protecting on the downside as the drawdowns are vicious. If you can hold on to the portfolio, it should outperform the market.

 

As a screen to generate ideas, it is pretty nice.

 

His other books 'The little book that beats the market' and 'Genius' are better.

:)

 

The magic formula is from "The Little Book that Beats the Market." Are you referring to the "Big Secret for the Small Investor?" That one basically talks about equal weighted index funds (with an added emphasis on value characteristics) from what I remember.

 

I did not like "Big Secret for the Small Investor".

 

Yes, the magic formula from "The Little Book that Beats the Market." and "Genius" are much better.

[peter1234]

It does 'work', just not as well as in the book.

 

He never disclosed the 'exact' formula.

 

There are lots of people that did backtesting on it.

 

One thing to note is that it is not a typical value strategy protecting on the downside as the drawdowns are vicious. If you can hold on to the portfolio, it should outperform the market.

 

As a screen to generate ideas, it is pretty nice.

 

His other books 'The little book that beats the market' and 'Genius' are better.

:)

 

The magic formula is from "The Little Book that Beats the Market." Are you referring to the "Big Secret for the Small Investor?" That one basically talks about equal weighted index funds (with an added emphasis on value characteristics) from what I remember.

 

Yes, the magic formula from "The Little Book that Beats the Market." and "Genius" are much better.

 

My comments above refer to the magic formula. Note that 'Magic Formula' is tongue in cheek. There is no magic formula.

;)

[cobafdek]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

[CorpRaider]

He had some interesting discussion of analysis of its performance in real life by both he and greenblatt in his presentation which was recently posted on this site in the book thread.

[west]

I'm still collecting data for this (it's been about four years now), but I haven't updated my data webpage (mentioned in this thread).  The data shows the MF outperforms, maybe 3%-4% more year on average since I've been collecting data, max.  However, the selection methodology on the website has seemed to shift over time, so who knows how consistent it will be going forward

 

At this point I feel like quant strategies are best for: Those who can backtest different startegies and come up with their own strategy based selections, "retired" fundamental-based investors who can have confidence in the system because they've got enough experience under their belt, and (maybe) people who can go years without checking their investment account.  And I think these latter most people should only use quant strategies if there's a 100% completely automated way to do so (no strategy shifts *at all* over time... I'm not sure this is the case with the MF website) while being cost effective as well.  And, at this time, I'm not sure there's a fund out there that fits these requirements...

[topofeaturellc]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

 

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

[KCLarkin]

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

The research I've seen that ROIC detracts from performance but reduces drawdown risk.

[topofeaturellc]

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

The research I've seen that ROIC detracts from performance but reduces drawdown risk.

that makes sense to me intuitively 

[topofeaturellc]

I'm still collecting data for this (it's been about four years now), but I haven't updated my data webpage (mentioned in this thread).  The data shows the MF outperforms, maybe 3%-4% more year on average since I've been collecting data, max.  However, the selection methodology on the website has seemed to shift over time, so who knows how consistent it will be going forward

 

At this point I feel like quant strategies are best for: Those who can backtest different startegies and come up with their own strategy based selections, "retired" fundamental-based investors who can have confidence in the system because they've got enough experience under their belt, and (maybe) people who can go years without checking their investment account.  And I think these latter most people should only use quant strategies if there's a 100% completely automated way to do so (no strategy shifts *at all* over time... I'm not sure this is the case with the MF website) while being cost effective as well.  And, at this time, I'm not sure there's a fund out there that fits these requirements...

 

There are some guys who come pretty close to pure value fundamental quant, but they aren't retail, and are surprisingly expensive. 

[ni-co]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

 

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

You can test it on portfolio123.com (with Compustat data) back to 1999 – it's not that far back but as far as it goes I don't see that he's got a valid point there. At least in my test (1-year rolling periods), the Magic Formula out-performed pure EV/EBITDA or EV/EBIT by about 6% per year.

[topofeaturellc]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

 

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

You can test it on portfolio123.com (with Compustat data) back to 1999 – it's not that far back but as far as it goes I don't see that he's got a valid point there. At least in my test (1-year rolling periods), the Magic Formula out-performed pure EV/EBITDA or EV/EBIT by about 6% per year.

 

His is hardly the only analysis I've seen, and the data Greenblatt himself talks about is supportive of the statement.

 

I've played around with something like this (as well as other quality factors) and arrived at a similar conclusion.

 

6% a year BTW is a massive number to outperform EV/EBIT by. Massive.  That' would be like almost 10% annualized over the market return.

[ni-co]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

 

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

You can test it on portfolio123.com (with Compustat data) back to 1999 – it's not that far back but as far as it goes I don't see that he's got a valid point there. At least in my test (1-year rolling periods), the Magic Formula out-performed pure EV/EBITDA or EV/EBIT by about 6% per year.

 

His is hardly the only analysis I've seen, and the data Greenblatt himself talks about is supportive of the statement.

 

I've played around with something like this (as well as other quality factors) and arrived at a similar conclusion.

 

6% a year BTW is a massive number to outperform EV/EBIT by. Massive.  That' would be like almost 10% annualized over the market return.

 

Yes, it's massive. So are the results in Greenblatt's book. Heck, it's only a year but he's very much on track beating the S&P 500 by 10% with his long/short fund:

https://www.gothamfunds.com/Funds.aspx?FundID=1

[peter1234]

Yes, it's massive. So are the results in Greenblatt's book. Heck, it's only a year but he's very much on track beating the S&P 500 by 10% with his long/short fund:

https://www.gothamfunds.com/Funds.aspx?FundID=1

 

Nice, thanks for the link.

 

Note that he is 177% Long and 77% Short, resulting in Net of 100% and Gross of 254%.

 

Will be interesting to watch in choppy market.

 

;)

[CorpRaider]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

 

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

You can test it on portfolio123.com (with Compustat data) back to 1999 – it's not that far back but as far as it goes I don't see that he's got a valid point there. At least in my test (1-year rolling periods), the Magic Formula out-performed pure EV/EBITDA or EV/EBIT by about 6% per year.

 

His is hardly the only analysis I've seen, and the data Greenblatt himself talks about is supportive of the statement.

 

I've played around with something like this (as well as other quality factors) and arrived at a similar conclusion.

 

6% a year BTW is a massive number to outperform EV/EBIT by. Massive.  That' would be like almost 10% annualized over the market return.

 

I would be curious to know what other quality factors you have looked at.  I am interested to see how something like cash earnings/low accruals would work.  Seems like you just need something to screen out some of the frauds and accounting oddities.  To me a one year snapshot of ROIC isn't the greatest factor for that.

 

Your point about the impact of quality on drawdowns is probably pretty insightful.  One could probably argue Buffett brought in the quality focus for that reason around the time he started using float and drawdowns could become really problematic for him. 

 

Have any of you guys looked much at the ishares enhanced etfs?  They combine value and quality ("factor tilts") , but I think they use P/B and cash accruals for their value and quality proxys.  The tickers are IELG, IESM, IEIL and IEIS, (I think) for the domestic and foreign etfs, respectively.  They all have low expense ratios.  Also, Wes Gray (Quantitative Value) is going to launch some etfs it looks like this year.  I will be interested to see what the expense ratios are on those.

 

Another interesting thing to me is that the international mf mutual fund was getting smoked by its index and now I notice gotham is only offering domestic funds.  Must be some problem with getting good data.

[CorpRaider]

And I think these latter most people should only use quant strategies if there's a 100% completely automated way to do so (no strategy shifts *at all* over time... I'm not sure this is the case with the MF website) while being cost effective as well.  And, at this time, I'm not sure there's a fund out there that fits these requirements...

 

One other sort of "weak form" option for people you discuss, in addition to the Ishares factor etfs, might be the guggenheim pure value etfs, especially RPV.  The expense ratios aren't terrible and they are value weighted, primarily using price to book if memory serves.  You could probably make a compelling case that since RPV is limited to S&P 500 funds that is in effect somewhat of a quality screen, as many of the criteria for inclusion in the S&P 500 are at least quality-esque.

[jb85]

I started using MFI with real money in 2007.  I've added a quick general market screen on whether to invest in large (1B+ market cap) or small market cap based on P/E multiples of the sp500 vs russell 2000.

 

Its basically been investing in all large caps since 2007...large cap only MFI has done very well...slightly better than Pabrai over that time frame (2007-2013). we'll see if that continues

[ni-co]

Yes, it's massive. So are the results in Greenblatt's book. Heck, it's only a year but he's very much on track beating the S&P 500 by 10% with his long/short fund:

https://www.gothamfunds.com/Funds.aspx?FundID=1

 

Nice, thanks for the link.

 

Note that he is 177% Long and 77% Short, resulting in Net of 100% and Gross of 254%.

 

Will be interesting to watch in choppy market.

 

;)

 

I don't think this would change anything because of the index-like diversification of these funds (> 400 stocks long and > 400 short). I guess the worst case would be a period like 98/99 with value stocks severely underperforming.

[topofeaturellc]

Bump, thanks to threads started by Kraven and west regarding

 

 

In this session, he states he has come full circle now, and would quite happily investing using MF, with the caveats of following Greenblatt's instructions to the letter, no trying to improve on the formula, no cherry-picking.

 

The silence is deafening.  Anybody (especially the naysayers) changing his mind and thinking about actually using MF?

 

Well that's not quite what he said.  He said he would be happy using it, but he things it has one too many factors - i.e. the ROIC calc detracts from performance.

 

You can test it on portfolio123.com (with Compustat data) back to 1999 – it's not that far back but as far as it goes I don't see that he's got a valid point there. At least in my test (1-year rolling periods), the Magic Formula out-performed pure EV/EBITDA or EV/EBIT by about 6% per year.

 

His is hardly the only analysis I've seen, and the data Greenblatt himself talks about is supportive of the statement.

 

I've played around with something like this (as well as other quality factors) and arrived at a similar conclusion.

 

6% a year BTW is a massive number to outperform EV/EBIT by. Massive.  That' would be like almost 10% annualized over the market return.

 

I would be curious to know what other quality factors you have looked at.  I am interested to see how something like cash earnings/low accruals would work.  Seems like you just need something to screen out some of the frauds and accounting oddities.  To me a one year snapshot of ROIC isn't the greatest factor for that.

 

Your point about the impact of quality on drawdowns is probably pretty insightful.  One could probably argue Buffett brought in the quality focus for that reason around the time he started using float and drawdowns could become really problematic for him. 

 

Have any of you guys looked much at the ishares enhanced etfs?  They combine value and quality ("factor tilts") , but I think they use P/B and cash accruals for their value and quality proxys.  The tickers are IELG, IESM, IEIL and IEIS, (I think) for the domestic and foreign etfs, respectively.  They all have low expense ratios.  Also, Wes Gray (Quantitative Value) is going to launch some etfs it looks like this year.  I will be interested to see what the expense ratios are on those.

 

Another interesting thing to me is that the international mf mutual fund was getting smoked by its index and now I notice gotham is only offering domestic funds.  Must be some problem with getting good data.

 

Accruals used to be awesome.  Its like one of the only factors I can think of that actually got arbitraged away.  I think Quantitative Value has some data on it.  Also Empirical Value Partners has done some work on it.

 

A lot of smart value L-S guys were using it to drive their short book during the dot.com bust.

 

My work was a little weird in that I was specifically looking for factors that parsed value traps from value opportunites in a universe defined by the cheapest quintile of something like EV/EBITDA-Capex. 

 

If you haven't checked it out AQR has a paper out there on something they call the quality minus junk factor that's worth your time.

[CorpRaider]

Thanks.  I think I read it, but I will double check.  Here's the paper upon which I believe the methodology employed in the Ishares enhanced etfs is based:

 

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2179247