It seems about all the major trading platforms now have commission-free trades. Even Vanguard brokerage accounts now have them. The only possible downside of free trades that I can see would be that undisciplined investors now have no incentives to restrain from over-trading. They may do even less research and have even less commitment to their investment decisions. Overall, however, free trades is a great thing, including for those following the Magic Formula strategy. This will affect how I trade. A great example is on re-balancing the portfolio. I’ve already encountered some situations where a MF stock that had made me money was still showing up on the magicformulainvesting.com screener. Sometimes I wanted to keep the stock, but the valuation was far out of line with rest of the portfolio, creating an unbalanced situation. I could have simply sold some shares, but it was hard to justify it because of the commission. I have a relatively small portfolio, and I didn’t want to pay a $7 commission just to sell a couple hundred dollars worth of stock. So too often I just ended up selling the entire position and using the screener to choose a new stock. Now the commission-free trades makes it easier to buy or sell even a few shares to keep my portfolio balanced without having to worry that commissions are eating you alive.
Hi Andrew,
I just found your site and read all your back updates. I’m also a software engineer, also a conservative investor with practically everything in Vanguard broad market index mutual funds and a few dividend stocks. I also happened upon Greenblatt’s book by total chance, am considering doing a very similar experiment, and I think I would have written 90%+ the same things you said about it!
I’m still in the learning phase and haven’t committed to MFI yet I just wanted to send you some kudos for running your experiment and putting your results and thoughts to the public. As you noted, the internet has plenty of rhetoric and anecdotes but little in the way of hard, detailed experience.
Some feedback – I would have been interested in seeing some kind of temporal report of your holdings progress, over the point-in-time snapshots from your tracker. Also, it would have been interesting to see more of your observations and analysis. Have you noticed trends with issue types? Did you screen for Chinese reverse mergers and stocks with one-time cash receipts? When you decided to do more steering, what analysis did you do? And did your cherry picked stocks perform differently than algorithm picks? Was your strategy implementation sound in retrospect? (Trade frequency, $50m cap, etc.) Those are just some thoughts that have come to mind as I read your updates.
Good luck!
Hello Matthew,
Congratulations, you’re the 2nd comment since I turned on my comments. I”m glad you enjoy the site. Yes, that would be nice to have some kind of real-time value of my portfolio vs. the S&P 500. And I’m sure I could figure out a way to do it, but it would be too depressing! Seriously, as the value of my portfolio shrinks, so does my interest in writing content about the Magic Formula. Chinese reverse mergers? I don’t know what that is. Let me be clear: I”m following the Magic Formula as described in the book as best I can. There are no “cherry-picked” stocks. Every stock in the portfolio comes directly from Greenblatt’s site, magicformulainvesting.com. The strategy is supposed to identify stocks with low P/E ratios. Before I buy any of the stocks I check the P/E ratio as a sanity check. If the P/E ratio is “—-“, meaning the company is not profitable, it means something’s wrong. The screener is not making sense. In those cases I’m not going to buy that stock but instead pick from one of the other stocks on the screener. Greenblatt intended us to do that, otherwise the screener wouldn’t include an option for 50 stocks when The Book continuously mentions 30 stocks. The Book also conveniently leaves out the fact that many of the stocks stay on the screener for years at a time – I think that’s why he added the “Minimum market cap” to the screener.
Hi Andrew,
Your blog has been very interesting to read so thank you for that!!
I’m a big fan of the Magic Formula and in my opinion, it has a very high probability of outperforming over the long haul so I’d definitely recommend you stick with it. I spend a lot of time working on my investments and Joel Greenblatt is a very good investor, if not one of the best in my opinion.
One thing to bear in mind with commission-free trading is the spread between the bid and the ask price when you trade (especially with the companies with a market cap below $1B). Often micro-cap companies with a market cap of below $100m will have a 2-5% spread which means if you frequently trade it could cost more than you imagine. Personally, I would only buy companies over $1B in market cap and I would concentrate the portfolio slightly more down to 15-20 stocks to increase the expected return. Since I invest through a tax-free account I would be inclined to check the stock screener regularly and sell the stock in a company that is no longer in the top 50 ranked stocks over $1B in market cap and replace them with higher-ranked stocks. The strategy of holding stocks for less than a year if their ranking decreases has huge potential in my opinion and it is what Joel does at his Gotham Asset management.
I haven’t started using his formula yet but intend to use it when I am done with my research and when I think the US market is more reasonably priced.
It would be interesting to hear back from you,
Kind regards,
Sam
Hi Sam,
Thanks for reading. I don’t doubt that Greenblatt holds stocks for less than a year if their ranking decreases but this is certainly not part of his “Little Book” strategy. I’m trying to follow the strategy laid out in his book as closely as possible. So far it has been a disaster and I’ve been tempted try different things to improve my fund’s performance, but then I wouldn’t be able to say “I followed Joel Greenblatt’s strategy for five years and here are my results.” Best of luck to you,
andrew