Hello readers. Here’s another update of my Magic Formula Portfolio that follows the investing strategy in Joel Greenblatt’s “The Little Book that Beats the Market”.
My total return since February 2017 is just over 32%. The SPY (S&P 500 Index ETF) return over that same period is over 89%, not including dividends. IDT Corp stands out. So does Voyager Therapeutics. I don’t have anything else to write. I’ll post at least one more of these by the end of the year, before I start another round of replacing these stocks.
Hi Andrew,
I’m a noob at this, but would it be correct to summarize from this post that you would have made more money since 2017 by simply have putting it all in the S&P 500 Index ETF?
Thanks,
Bobby
You are correct Bobby!
Hi Andrew,
What a wonderful site you have created here. Just what people need to check out, if it really works 🙂
I JUST finished the book this weekend, and now I’m doing some searching around to see what experience people have.
Have you been able to find a place, where they keep track of the books original 1988 data until today? I read the second book that shows data until 2009, but I haven’t found from that point on.
Awesome work man! 🙂
All the best,
Martin
Hi Martin,
Thanks for the kind words. I’ve never seen any indication that the data used to make the claims in the book is available. If he showed that, I think he would have to show a lot of explanatory text to describe things like “company ABC had to be replaced because the shares were sold early via a corporate merger”, or “company xyz was sold but could not be immediately replaced because there are insufficient funds in the account to buy equal amounts of the new company”. Indeed, I find this lack of explanation in “The Little Book that Still Beats the Market” to be increasingly fishy.
Take care,
andrew
Thanks for sharing your experience over the past few years. It really is good to see how patience is required and glad to see value seeming to gain ground in late 2021.
Also, a belated welcome to Fort Worth! While we live in Austin now, I have a warm spot for that city and look forward to running the Cowtown in Feb.
Thanks again,
Blair
Hi Blair,
Fort Worth has been very good to me so far. As for the portfolio – yes it gained some ground in 2021 but I’m not that optimistic about it. I’m not giving up though. I’ll give another update before it’s time for me to begin another round of transactions around the end of the year.
Thanks for reading and watch out for all those bats in Austin!
andrew
Hi Andrew,
We had contact before, About random picking of the MFI stocks.
Same negative experience here… and I started back in 2011…
BUT… I think there are 3 possible scenarios now:
1: we believe value investing stopped working forever and its better to invest in a SP 500 ETF.
2: the market is efficient after All.. and therefore we could also invest in a low cost SP500 ETF.
3: the MF needs to play out in the coming years and we regret BIG TIME that we didn’t stick with the plan…..
Only If we believe 1 is true (besides the higher transaction costs… than an ETF)… we should change directions…
Interested in your view on this Andrew!
Take care,
Wouter Haenen
Hello again Wouter!
You forgot scenario #4: The two of us start a corporation, hire an attorney to file a class action lawsuit against Joel Greenblatt, and pay ourselves huge salaries from all the dough we get from the suit.
But seriously, yes, I remember our discussion on random picking, which did influence my use of the strategy. I didn’t know you’ve been doing this since 2011. Some quick thoughts on your points are: For Point 1: it’s very difficult to outperform the S&P 500 index consistently so most people should have index funds as the core of their portfolios. While I think it’s possible to have a value investing strategy that “works”, so far there’s no proof that any of them beat the market in the long-run. Point 2: I believe the market is efficient in the long run, but certainly not in the short run. A perfect example is in March of last year when virtually the entire market plunged due to COVID. Of course there was a lot of uncertainty, but could anyone make a case that it made sense for Johnson and Johnson’s stock to fall 20% and then to reach an all-time high a month later? That’s not “efficient” because it couldn’t have had anything to do with the company’s fundamentals. A savvy investor can find these “values” and take advantage of them. Point 3: I don’t think I’m going to give up on the strategy just yet (I’m coming up on 5 years), but I doubt that I’d stick with it as long as you. Instead, I might continue to use the screener to identify companies that I’d invest in anyways but are now on sale.
Take care,
andrew
Addition to my previous post:
With “stopped working”(point 1) I Mean Will perform worse than the market forever..
Regards, Wouter
Hi Andrew,
Nice to hear from you, and a great plan this lawsuit hahaha, I’m not sure if we will manage to keep pace with Joel according to the costs of these trials though… which is his fault again then after all…
Now about efficiency of the market. I look at it as follows: in the short term (1 year or so) it is impossible to predict the market, or individual stock prices. But in the longer term, it should be doable to outperform the market. If we really would believe the market is efficient in the long term, then value investing wouldn’t make sense. Even beaten up value stocks would be priced according to their risk-reward level. So whatever you would buy would give you the same result in the long run. I think the value stocks are jugged too negatively and could outperform in the long run. In fact there is quite a lot of evidence for that:
https://www.bankrate.com/investing/growth-investing-vs-value-investing/
https://www.northerntrust.com/documents/commentary/investment-strategy/is-there-value.pdf
https://www.etftrends.com/etf-strategist-channel/value-vs-growth-a-brief-historical-view/
… but you have to look at a 90 year period. In the last article you can see my timing couldn’t be worse to start this.
So I’ll stick with the plan for now with the risk that I’m still waiting for “the great rotation to value” in my 80-ies….
Hope to hear from you,
regards,
Wouter
Thanks for these articles Wouter. I’m going to look into these over the weekend.
Keep in touch and good luck!
andrew
hi Andrew,
Great, let’s keep in touch indeed. This is another interesting one about long term value premium – proof…
https://seekingalpha.com/amp/article/4041868-really-long-term-return-on-stocks
take care,
Wouter
Wouter, are you able to share your magic formula experience? Happy to chat in private if more comfortable.