Happy Holidays to all you Magic Formula Enthusiasts! Here is my final Portfolio update for 2021:
The Portfolio, following a strategy spelled out in Joel Greenblatt’s best-selling book “The Little Book that Still Beats the Market”, has increased in value just over 36% since I completed picking the first 30 stocks in February of 2017. Ladies and Germs, my Magic Formula Portfolio is not still beating the market. In fact, it never was. The “market”, represented by the SPY ETF, which tracks the S&P 500 index, is up nearly 96% during the same period, absolutely crushing my portfolio. I don’t feel so bad though because I just took a look over Greenblatt’s Gotham Funds site. Gotham is a hedge/value investing fund company that Greenblatt runs along with a partner. None of Gotham’s funds are beating the market either. Why am I following this guy’s strategy again?
Seriously, As I approach the Five Year Mark of this noble experiment I’m trying to decide just how long I should keep this up. I’m starting to re-read Little Book to compare some of its claims with my experience. Watch for more on that in future posts. One observation I have to share before mixing up another big vat of eggnog: In the nearly five years since I’ve been doing this I’ve been contacted by a number of readers. Not that many – my lack of enthusiasm for this Formula has caused me to not spend so much time touting a portfolio that has failed to compete with its benchmark. I don’t write many posts or market the site much. Anyway, some people do contact me. Most thank me for the info, and tell me they’re interested in following the Formula themselves, and that they plan to start soon. Not one person has written something like “Andrew, I don’t know what you’re doing wrong because I have a seven-year-old Magic Portfolio that has been soundly beating the market, just like Joel describes in the Little Book!”. On the contrary, the only people that have contacted me who claim to have their own MF Portfolios admit they’re in exactly the same boat: the Titanic.
May your days be merry and bright!
Have you tried using long term call options or LEAPS in replacement of the stock itself? I’ve been thinking about using this MF strategy and options to amplify alpha, but maybe the acquirer’s multiple is better for LEAPS.
Hi Caleb,
I have not tried to use options with the strategy because then I wouldn’t be following the strategy. Magic Formula Experience seeks to follow Greenblatt’s book as closely as possible. Also, a core part of the strategy is to hold each stock almost exactly one year and LEAPS, as I understand them, are longer term so I don’t see how they would apply.
Thanks,
andrew
I am a follower of your blog and I appreciate your updates. Please, don’t surrender right now. Value has been out of favor for more than a decade. Growth vs value is at historically hight similar to dot com bubble. You need to wait at least a full value/growth cycle to take a decision, and there are starting to be many signs of a reversal approaching. Interest rates increasing may crush growth.
I have been following the strategy for 3years and I amb inline with S&P500.
Hello Antoni,
Thanks for reading and for the encouragement. I’m not surrendering just yet. If you are in line with the S&P you’re doing better than anybody I’ve encountered following this strategy! Another reason for my pessimism: Greenblatt has said in an interview from years ago that the strategy works better in a bull market! I shudder to think what’ll happen to my portfolio during a bear. Anyway, Merry Christmas, and take care,
andrew
Yes, I have to concur with everything Antoni said. The turnaround already began in November. I subscribe to Motley Fool just to track the performance of these growth stocks and then I have proprietary value (for money) strategies: Motley Fool’s Stock Advisor stocks went down 11.1% in November! Compare this to the total stock market (ITOT) that went down only 1.5% and my own proprietary value (for money) strategy that only went down 0.7%. And let me tell you, the blood bath of these growth stocks continues in Dec..
I am about to launch my own investing blog / service soon where I track these strategies at vndesta.com
Hi Andrew,
Came across your blog randomly. I first read the original book years ago but never implemented and MF came across my mind again.
Having been around investing (not that successfully but not a huge failure…) for a while I have a couple of comments. In regards to the growth stock slaughter…yeah…there are people holding CRWD, ZM, PTON which are all down substantially…so maybe value will turn around.
For what it’s worth, Berkshire Hathaway…since Feb 2017 it has underperformed the S&P (just eyeballing, 80% vs 100%).
I came across a YouTuber (https://www.youtube.com/watch?v=Qb4V2A5qLBw&t=686s) who also does MF. She’s only doing it yearly, so I guess she’ll have an update in Feb so it’ll be interesting how her portfolio is doing.
I noticed that her portfolio had a biotech stock that tanked. I know in MF you avoid financial and utilities stocks for reasons related to their accounting – but I was surprised that biotech was screened out and wanted to hear your opinion. From my experience, biotech, especially sub $1billion are influenced by their clinicial trials. A sub $ 1 billion biotech company with one drug in their pipeline can be worthless the next day if a trial fails. On the other hand they could 10x in a month. But the point is, it’s kind of gambling and not value based.
I poked around your portfolio and noticed you’ve held these, which I believe lost money: VYGR, CHRS, RPRX, LXRX, AEZS
I also noticed some 4-5 letter tickers which aren’t usually core US stocks, and that I’m usually skeptical of: LTRPA, GTXMQ
A specific question of mine would be – have you ever looked and see what happens if you removed biotech, or these 5 letter foreign or OTC tickers (whatever they are…)
A generic question – based on the 80/20 principal a lot of your gains would be by 20% of your stocks and a lot of your losses the same. The rest would meander around. Have you looked at what your bottom 20% stocks were and if there’s a pattern?
For example, market cap? To me, if screening for just above $100 million…IMHO a publically listed $100 million company ought to still be in the growth phase and any company trying to be ‘value’ at the stage may limited have upside. So, market cap could be another criteria.
I think your journey of several years has produced some data to see if tweaks can be made.
Thank you for your updates…if you celebrate it, Merry Christmas! And a happy new year.
Hello AGB! Merry Christmas to you! I do celebrate it – but doesn’t everybody nowadays? Christmas is mainly about Money, and a little time off from work. I’ve seen that YouTuber before – she contacted me once to commiserate. You have some interesting ideas, but you see, the Little Book that Beats the Market makes some very big claims about performance if you simply follow the strategy. As soon as you deviate from it then you can’t claim to be following the formula anymore, and then my experiment would be worthless to people like you who want to see others’ experiences. So far, I claim that I’ve not deviated from anything Greenblatt writes in his book. It may be interesting to do something like “follow the Formula, except screen out Biotech stocks” but I don’t have time for something like that. But thanks for reading, do keep in touch, and have a Great 2022!!!
andrew
Hah – yes Christmas is widely adopted and celebrated to a certain extent by most people but maybe you’re Jewish 🙂
I’ll see if I can dig around more this weekend but if you don’t see a follow up post I got bored and followed another shiny object.
I took your original portfoli from Feb 2017 and just looked at it a bit. First there’s 7 stocks that are no longer listed (bought out, bankrupt…): AMAG, CA, CHKE, FPRX, ICON, MSGN, SCMP and I’m using a simple tool that doesn’t have historical tickers so I can’t comment on those performances.
First observation I think it’s interesting to see that from year to year, AGTC was the worst performer and it was a small biotech stock (just over $100 million market cap at the time). The the other 3 biotechs, BIIB, GILD and PDLI did ok and made money year over year. BIIB and GILD are multi billion biotech stocks and PDLI was over $300 million at the time.
Another note on AGTC and PDLI is their “Dollar Volume” is very low. AGTC was less than $500,000 and PDLI less than $2million. That means in an entire day, less than $500,000 worth of money was exchange per day with AGTC. To put it bluntly – it’s not institutional quality. The lowest performers on that list have low dollar volume…NHTC was $2mill, LFVN < $1mill, etc…As another note, the best performer was MCFT and it had dollar volume is < $2million.
Dollar volume is simply calculated by the price of a stock multiplied by volume traded for that day.
In essence, if a company is valued cheaply and we are relying on institutions buying it at some point because it's cheap…they need to be buyable for an institution and an illiquid stock is not buyable.
Another calculation I ran was…if I took your original portfolio and divided it evenly by 30…and never added or sold a single share, what would happened? Now I can't figure out the pricing for the 7 unlisted stocks, but based on the 23…if I invested $3.33 each, I would have $144.50 today. That means, not even including dividend, or the 7 unlisted stocks I'd have 44.5% return which beats what you've been doing…and that doesn't include the 7 unlisted stocks, which unless it went to $0, it would further add to the 44.5% return (even if the price dropped by half it would add 11%). Of course, this includes GME…but that's as much as a fluke as a stock losing 75% of its value.
Below are the stocks + gains (not a percent gain, but dollar gain…i.e. 2 means going from $1 to $2, not 200%)
Note of the 23 stocks, 6 doubled or more (8 if we can include CSCO and VEC which are near 2) while 6 loss 20% in value. Essentially, the Pareto principle (80/20 rule) applied to the biggest winner and biggest losers.
GME 5.93
AVID 5.74
IRMD 5.34
QCOM 3.38
MBUU 3.11
HPQ 2.4
CSCO 1.98
VEC 1.96
MCFT 1.81
NRT 1.28
TGNA 1.24
HRB 1.12
BBSI 1.1
PDLI 1.09
GILD 1.09
LFVN 0.97
BIIB 0.86
NTIP 0.79
IDCC 0.75
PBI 0.51
SPOK 0.45
AGTC 0.27
NHTC 0.24
Hi Andrew,
Thank you for letting on us aboard on your journey with the MagicFormula. As many other investors I have also been reading about the MagicFormula, but I think the book needed more evidence to back its arguments. I’m happy to have found your site, where we follow a live version of the MagicFormula.
Thank you for your help.
Best Jon.
Thanks for reading Jon!
Wow if I had known there are so many strategies and in the meantime I am just learning and learning and learning. And the more I learn strategies and all of them from the field of value investing. (Because that’s the only thing I believe in) It’s also something my dad did back in the 1970s. That way I come out more confused. !! The truth is I have not yet learned Joel Greenblatt’s strategy and I do not know it. Although I was exposed on his website to the list of recommended stocks for today. :))))) But after what I read here in the comments, and I of course believe every word. I’m starting to get a little skeptical even before I start learning the strategy. !! . What bothers me the most is the confusion that results in valuing a company. And the results for eligible companies do not overlap. !! And it bothers me a little. Because if it’s mathematical calculations. We must reach quite similar results. !! Even if not really an identity. My logic tells me that out of fifty stocks. There must be at least 50 percent overlap in them. !! But from what I’m been going through the last few days it’s really not like that. !! And that’s what bothers me even more. Because if you found a good company under the radar, you should get an overlap between the strategies. And unfortunately it does not exist. And now the question arises which of the strategies is more correct? Apparently the multiplicity of strategies is a mistake. It may be better to study just one and focus on it. And close eyes and ears. Because it’s really confusing. !! (If there are typos sorry with you)
Glad to meet you Andrew. !
I am chaim from Israel
Hello Chaim,
Glad to meet you too! One thing that makes it difficult to summarily criticize this strategy is that the potential stocks in the portfolio change every trading day. So you and I can start a Magic Formula portfolio at roughly the same time, purchase our 30 stocks throughout the year, choosing from Greenblatt’s website, and still have completely different portfolios. It’s possible for my magic formula portfolio to beat the market, while yours gets crushed. One of us may say “yeah, this strategy is great!”, while the other wants his money back. And we both followed the strategy completely according to the book! Chaim, if you want my advice – buy an Index Fund.
Take care,
andrew
Hi Andrew, just wanted to say thank you for writing these blog posts. Have been following it for 2 years now and you convinced me NOT to try this myself.
I wish you all the best and hope you hit gold before you quit this strategy.
Hello Arno,
Thanks for following. I’m just finishing up another round of transactions and will post about it soon. Unfortunately, as Led Zeppelin would say, “the song remains the same”.
andrew
Hey Andrew!
Have you read the book The Acquirer’s Multiple by Tobias E. Carlisle ? It compares the magic formula to another method which consists on investing in fair companies at wonderful price instead of wonderful companies at fair price. They also made a website proposing different stocks. It supposedly beats the market and Greenblatt’s formula.
If yes, did you still prefer to use the magic formula?
Thanks for sharing this experience with us!!
Best,
Steph
Hello Steph,
I never heard of the Acquirer’s Multiple but you have piqued my interest. The way you describe it makes it sound similar to Greenblatt’s thing. I’ll check it out.
Thanks for sharing!
andrew
Andrew, after reading these comments, and thinking a bit about the cycle we are in, I am very curious to see how you perform in the next 2-3 years. Theoretically you should outperform the market now that it is down so much, ie you have less volatility, and you have larger margins of safety. Like i said it will be very very interesting to see how this plays out, so thank you for keeping the experiment going!!! One more thing. Can you explain what you are doing with Dividends? How are you reinvesting them? I think you said you add them to your cash holdings and then use that to re-invest? I didnt hear anything about reinvesting the proceeds in the book (audible, lol). I would think that if you follow the warrant buffet strategy you keep on investing in the compounding machine…
Hi Chris,
I think you’re right that The Book doesn’t mention dividends – or not much anyway. In short, I reinvest all dividends. I don’t auto-invest dividends in the companies that pay them. One thing The Book is clear on is that the stocks should be purchased in equal amounts. So when it’s time to invest in another company, I take my entire MF account balance, which includes all dividends recently received and proceeds from the sale of stock that’s being replaced, divide by 30, and invest that much in the new company. Because share prices vary so much and the stock that’s being replaced may have gone up or down dramatically, there’s no way it can be perfect, but it’s pretty well balanced. Thanks for reading!
andrew