Ok, it’s time to sell one of your Magic Formula Stocks and replace it with another. So you go to MagicFormulaInvesting.com and run the screener for 30 or stocks. You compare the results with the stocks you already have in your portfolio, subtracting those. You see that there are 15 stocks that you don’t currently own:
Which one do you choose? Well, a couple of those 15 may jump out at you, like “Altria! They pay a nice dividend!” Or, “Altria! Their products kill people!” Or, “HP! I know their products!” Or, “HP, I hate their products!” This is a danger because your emotions, ignorance, knowledge, prejudices or opinions about these stocks is not part of the Magic Formula. One of shortcomings of the book is that it doesn’t explicitly say what to do in this situation. Mr. Greenblatt could have made this much easier by listing the results in order of their MF score; instead, the companies are listed alphabetically. You could use the strategy of just starting from the top of the list and going down. But if you did this every time nearly every stock in your MF portfolio would start with a letter from the first half of the alphabet. Would that be a bad thing? One of my readers pointed out this article on Seeking Alpha where Greenblatt supposedly said in an online column (though I can’t find the actual column – can you?) that it’s best to choose randomly – and I agree that this makes sense.
To wit, I’ve created this simple random number generator for us to use in order to help choose your stocks randomly. Continuing our example from above, instead of choosing from among the 15 candidate stocks by your own logic, type in 15 in the “Number of Choices” field below, then click the “Generate” button. Just below, your randomly generated number will appear. If it’s number 4, then on the Magic Formula Investing results, choose the 4th stock on the list that you don’t already own. Again looking at our example, that would be Ebix Inc. What’s that you say? You don’t like EBIX and you want to buy Xerox instead? Too bad!
Number will be generated here.
If you then need to buy another one today, type in 14 to the Number of Choices field and hit Generate again. Repeat ad nauseum. But don’t keep clicking the button just to get the stock on the list you happen to like!