Hello Magic Formula enthusiasts! Here’s an update after my latest trade, getting rid of the abysmal investment in Nautilus (NLS) and buying gun company Sturm Ruger (RGR). As usual, this was chosen randomly using my Random MF Stock Picker.
Another thing: A “corporate action” happened in March. Biodelivery Sciences (BDSI) was acquired, so I had to choose another stock. I randomly chose Korn Ferry (KFY) . I was signed up for every kind of email notification Vanguard has, and they failed to notify me of this. Luckily I found out only a few days after the transaction happened. These kind of buyouts happen all the time, so I’m curious as to why Joel Greenblatt never mentioned corporate mergers and how to handle them in his Little Book.
Anyway, my MF Portfolio has a total return of over 20%, and the SPY (S&P 500 ETF) has returned nearly 78% in the same time period.
Hi Andrew. Really awesome that you are posting these updates publicly. I just finished the book, and while I really believe in the concept, I dont fully understand how the replacement of stock actually works. Isnt part of the thesis that you buy and hold over a longer period of time? Am I right in that Joel says to divest of stocks after 12 months? Or do you simply remove the ones that are no longer on the list at the time you do your next screening? Would love your input here.
Hi Chris,
The strategy is to keep each investment for about one year. For tax purposes, the direction is to hold all stocks that have gone up for just over a year (so the sale results in long-term capital gains), and hold stocks that have gone done just under one year (so the loss on the sale can be taken in the current year). My MF portfolio happens to be in a retirement account so I don’t have to worry about taxes right now, but I still follow the strategy’s direction of when to sell. Now, when it’s time to sell and the stock is still on the list, what to do? The Book is not clear on this. But on Greenblatt’s website it says “Sometimes a previously owned stock will remain on the list and then you must decide if you want to continue to hold this stock”. You must decide? I’ve found it a bad idea to pick and choose based on your own judgment and Greenblatt himself has said in an interview it’s better to choose randomly. So what I do when it’s time to sell a stock still on the list after one year (and this happens a lot) is use my Random MF Stock Picker. If my picker randomly chooses the stock still on the list, I won’t sell it outright, but rather rebalance it, buying or selling some shares to bring that investment about equal to 1/30 of the portfolio. I hope that helps!
Thanks,
andrew
this is really neat you are doing this. what software program are you using for this? ALso it will be real interesting to see if this value method begins to pick up lost ground now that the market is moving back into a strong value cycle. thanks for making this public.
Hi Andrea,
I’m not using any software program. Unlike Greenblatt’s book the results I show are from my actual brokerage account! If you are referring to keeping your portfolio balanced, please see my post on this. I just use a simple spreadsheet to help do some of the calculations.
Thanks for reading!
andrew
thanks. FYI there is another very similar method out there called the aquirers multiple. I wonder if you have heard of it? It also uses undervalued companies with a slightly different metric. The author claims it slightly beats the method that you are using. Just thought I would forward it on to you since you are working so hard at this. Its worth your time to take a peek. https://acquirersmultiple.com/
Hi Andrea,
You’re the second reader that brought up the Acquirer’s Multiple. I’m going to try to read that soon and I’ll probably write a post on it! No promises on when that will be though. I’ve gotta catch up with my New Yorker subscription first!
Thanks,
andrew