I finished the latest round of Magic Formula transactions nearly a week ago, when we Texans were in the middle of the worst winter storm to hit the state since 1986 or so. I was very lucky, never losing power at my place. My worst problem was my kitchen sink froze up for a few days. We were washing dishes in the bathroom! But things have since thawed out and I’m ready to update the world with the results of this Magic Formula experiment.
Here is my current Portfolio:
It’s been just over four years since I began this experiment, and I have to admit things are going a bit better recently, though the Portfolio is still far underperforming the market. The Portfolio has made me about $11,525, or just over 19%, which doesn’t sound that bad, until you consider an S&P 500 Index ETF (SPY) returned over 68% in that same time period not even including dividends.
Many of the stocks above have appeared on the Magic Formula Investing screener for years, and several have been in my portfolio multiple times. Since the beginning, I’ve always selected 30 stocks from the screener, usually using the “30” Number of Stocks option and 50 Million for the Minimum Market Cap parameter, both of which are the defaults. But I haven’t been totally consistent. I have, in the past, altered both of these parameters in an attempt to diversify my selection of stocks, especially when I grew frustrated with the stickiness of Magic Formula stocks. I was frustrated because Greenblatt never addressed this stickiness, even with his revised book, “The Little Book that Still Beats the Market”. He also never recommends how to pick the stocks using the portfolio. Do you just randomly do it, use your best judgement, try to choose stocks that you haven’t previously owned before? And so on. The strategy itself is simple but there are a lot of small details. A naïve newbie may say “just buy all thirty stocks on the screener”. But that doesn’t work, because you’re not buying them all at once. You buy a few at a time. Then the next time some of those 30 stocks have changed. So if you bought 5 last week, this week you’re likely to have a different set of stocks on the screener, and not 25 remaining that you don’t currently own, but 27 or 28, for example. So you have to have some way of choosing the remaining stocks. One of my readers pointed me to this 2017 interview with Greenblatt where he recommends choosing the stocks randomly.
It’s just a small part of the interview. I decided to start doing this, 1, because it’s easier and leads to less kvetching, 2, because when I tried to choose using my own judgement the performance was miserable, and now 3, because Greenblatt himself is recommending it. So now I keep the two defaults on the screener page, and I choose every stock randomly. I’m not sure using my random stock picker will make a huge difference one way or another, but I sure wish Greenblatt would have stressed random picking in his books. He didn’t. The message in the books is that you just need to pick a bunch of these stocks, hold them each for a year, and over time your performance will kill the market. So far that has not been my experience. But I’m only four years in.
What is the problem in buying equal quantities for all 30 for the amount you like to invest – every time?
End of the year, you will have large number of stocks (greater than 30).
I’m not sure how or why you would have more than 30. The strategy is to have between 20 and 30 stocks.
It’s not a big problem to buy approximately equal amounts of each stock, but the fact that some stocks lose money and others gain over the year means there is some overhead involved in keeping your portfolio balanced. I wrote a post on this some years ago.
I believe these stocks should pick up soon as we are seeing growth transfer into value. Maybe…
Hi Shane,
We’ll see. My MF Portfolio recently started gaining on the S&P, but is still far behind the index.
Thanks for reading and take care!
andrew
I have been thinking of using the MF to invest and find your articles honest and useful. Thanks!
Hi FJ,
Thank you – it’s good to know my experience is useful to someone!
andrew
How is your portfolio doing? Will you be updating the picks? Hope that the Magic Formula is doing well in the 5th year.
Hi FJ,
The portfolio is doing a little better though still far underperforming the SPY. I will have an update soon. And I just realized – The Michaels Companies (MIK) were bought!
I made out on that one – the $22 selling price was over 38% higher than what I paid. I’m going to replace this tomorrow and provide an update soon.
Thanks a lot!
andrew
What do you think of Motley Fool Stock Advisor? I appreciate your input.
Hi FJ,
I was a Stock Advisor member for several years, and I do not recommend it. I like the Motley Fool in general, and I still visit their website for articles and investing ideas, but I don’t think the Stock Advisor service will outperform the Market and I don’t think it’s worth the money to join. I wrote an article on this years ago in the Stock Advisor forums that I’ll repost here if I can dig it up. The summary is: they do something very misleading (to say the least) when they compute the performance of their service. Sometimes the service will advise selling a previously-recommended stock – usually because it has plummeted in value and has no chance of recovering. That’s fine, but when they do so they drop this stock from their computation of performance! So they’re only counting the winners – and they’ve picked a lot of losers. The fact is, it’s very hard to outperform the market over the long run. One credit I give to Motley Fool, however: I joined the service in about 2009, and I had no experience investing in individual stocks. The service did give me some confidence to get started. But you don’t need to subscribe to Stock Advisor to do that.
Thanks, your candor saved me money. I look forward to seeing how your portfolio performs in your next update.
Glad I could be of help FJ!
I am Brazilian and recently started to invest in the US market, I also decided to use the magic formula, but I intend to buy 5 shares every three months and the selection criteria will be those that have increased the most in the last 6 months. Would you be able to do a test if you had chosen the stocks with this criterion?
Hello Laércio,
No, I don’t have the data available to do such an analysis. Also, I’m wondering how you came up with this strategy since it seems to run contrary to the Little Book that Beats the Market. The main feature of these stocks is that they’re undervalued by the market.
Good luck,
andrew
Thank you for posting this information. I am reading the book now and wanted to see if anyone has experience with it. This is helpful. Updates would also be appreciated.
Hello Ed,
I’m about to post another update just for you – unfortunately it’s much like the others.
andrew