Hello Magic Formula enthusiasts. I’m posting another update a few days after I replaced Points International (PCOM) with H&R Block (HRB). I chose the stock using my random picker. This is fourth time HRB has been part of my portfolio! Ok, here it is:
Things are looking up – but nowadays it seems like anybody can make money in the stock market. Still, my near 38% total return on the portfolio is being killed by the S&P 500’s 84% return since early 2017.
Thank you again for sharing!
I am following every post you make, keep up the good work!
A quick calculation i did showed that you gained around 8 % average annualy return in the course of 4 years.
Very different average annual returns then what Joel Greenblatt presents, did you still want to stick with this plan and see for the long(er) run, or are you already thinking about an exit plan?
HI Mister PD,
I committed to the strategy for at least five years because Greenblatt wrote in his book he’s never seen a Magic Formula portfolio underperform the market when followed for at least a five-year period. I guess I’m on track to be the first because I’m coming up on five years and I’m way behind the market. I probably will stick with it for a while longer though but I haven’t made a firm decision.
Thank you very much for reading!
andrew
Hi,
how cool you are writing this blog. Exaclty today I started mine, and to gather info a bumped into your page. I will read it thoroughly. I have the ambition not to choose randomly but to make somehow a selection based on certain criteria. That is maybe a difference.
For example today I made my first purchase: ASO and SNBR. Two companies I somewhat like.
And while choosing these 2 I excluded 2 others which seemed to be in the MF selection just by chance. One: FKWL is now facing a class action from angry shareholders because of book manipulation and lies regarding products. The second OVID: earnings last year were due to selling rights of future products sale. But at the moment is is a non profitable company and it might take a long time before it becomes one. For sure more than a year.
In conclusion, I have started my MF Challenge slightly differently but still remaining inside the boundaries of the book. My aim is to learn.
My benchmark will be:
1) SP500
2) MSCI ALL World index (usually I invest in ETF following this index)
3) MF companies I have excluded
4) MF randomly chose companies.
Superthanks for our blog!!! I will come back
Hi Giulio,
I’m impressed by your enthusiasm but at this point if someone asked me “would you recommend devoting a significant portion of my portfolio to following the MF strategy in Joel Greenblatt’s book?” I would reply “No” because I’m not convinced, after faithfully following the strategy for nearly 5 years, that it beats the market. It could beat the market, but my experience has been so different from what Greenblatt touts in his book that I have serious concerns about the claims, which I hope to write more on in the near future.
I do think his website is useful as a screener, however, that could reveal good companies that seem to be underpriced by the market.
Good luck to you and thanks for reading!
andrew
Hi Andrew, thanks for your kind reply and honesty.
I can imagine your disappointment as you have committed quite a significant amount of money to the the MF. For me, MF it si truly just an experiment and I am planning to invest a very little portion of my investment money. My aim is to better understand stock picking, and company valuation. That is why I want to choose the companies I invest in, rather than doing it randomly. My picks will be compared with a randomly picked selection. In the process, I hope to learn as much as possible. The majority of my investment money is in index funds and that will not change.
Apart from that let me give you some of my insights regarding your experience:
1) first of all you are making money, which is never bad and you have developed a truly worthy knowledge.
2) Having invested in a disciplined way, you have taken much, much less risks than the majority of investors who sold their funds at the end of March 2020, and bought it back just now. So let’s see if they are making more money than you. I doubt it.
3) It is true than the last 5 years have been very very Growth oriented years. This will eventually reverse. In the end, on the long term, all disciplined investing strategies tend to balance out (Ken Fischer). So, I am pretty sure that even if the MF is not perfect, eventually returns will be better than what you achieved lately. I have no idea what the market will do, but I expect sooner of later a bear market. I disciplined value oriented investor will likely come out better than the herd.
4) In my opinion, but I have to test it (I’ll compare my selection with a selection of excluded companies), there are some companies in the MF selection who definitely do not deserve our money: non profitable companies, and manipulators above all. I will try to avoid them.
Mine are just thoughts of course.
Giulio
I don’t think the MF can beat the Index when so much stimulus is being put into the economy and the interest rates have been so low ( 0.015 since 2009) With low interest rates to stimulate the growth of economy, its best to invest into high growth companies. Any value will lag, because high growth is driving the index like for example the FAANG companies have for the last decade.
Hi mate, really interested in this experiment, and keen to see how it pans out as I just finished the book. Regarding your upfront capital, how are you investing into these stocks? My understanding was that you identify a price of value then invest once or do you have strike prices you aim to hit? Would love to know your thoughts, and how much you’ve added to your positions over time. Thanks
Hi Steven,
No strike prices. When it’s time to change an investment (after one year) I sell the existing stock, randomly choose another one and invest 1/30 of the portfolio in the new stock. If you read some of my earlier posts I go into more detail on these things. I funded this experiment with a 401k rollover when I changed jobs a few years ago. I allocated about $60,000 to this strategy, and have not added more funds to the portfolio. I think this is the best way one can accurately gauge performance against another investment such as the SPY. Thanks for reading and I’ll give you another update soon!
andrew