Comments on: Magic Formula Investing: Will It Work? http://thefinancebuff.com/2007/08/magic-formula-investing-will-it-work.html like a friend telling you about money ... Thu, 19 Nov 2009 19:44:17 -0600 http://wordpress.org/?v=2.8 hourly 1 By: Anonymous http://thefinancebuff.com/2007/08/magic-formula-investing-will-it-work.html/comment-page-1#comment-693 Anonymous Sun, 15 Jun 2008 02:19:00 +0000 http://blog.thefinancebuff.com/?p=147#comment-693 Having started with the MF, with real and a fairly substantial amount of capital at the end of Dec. 2007, I have to say I am quite pleased with the results. I'm up about 13%, in a market that has been somewhat erratic, but largely off it's highs. <br/><br/>I start with a min cap of 50, looking at the top 50, but if I don't find stocks I like there, I go to the top 100. <br/><br/>Admittedly, I don't blindly picks the stocks. I see that there is no very recent bad news (like they're going under), I take a quick look at earnings for the last 4 quarters to make sure there are no one time gains included, I avoid stocks which have a high short position, and I do look for a current ratio above 2. Oh, and the stock should be near it's 52 week low, although I'm not as stubborn about that criterion. My goal is to hold 20 stocks, as I've realized it's a lot of work, so 30 would be too much. <br/><br/>Also, I use zecco, which gives me 10 free trades a month. <br/><br/>There are some issues with the list, I'll admit. Its supposed to exclude stocks with one time gains, but doesn't always. It's also not supposed to include foreign companies, but I notice Chinese stocks show up once in a while. <br/><br/>Remember, you are collecting 20-30 stocks, spread across different industries. That's a lot, and it's reasonably diversified. <br/><br/>Hope that helps. Having started with the MF, with real and a fairly substantial amount of capital at the end of Dec. 2007, I have to say I am quite pleased with the results. I'm up about 13%, in a market that has been somewhat erratic, but largely off it's highs.

I start with a min cap of 50, looking at the top 50, but if I don't find stocks I like there, I go to the top 100.

Admittedly, I don't blindly picks the stocks. I see that there is no very recent bad news (like they're going under), I take a quick look at earnings for the last 4 quarters to make sure there are no one time gains included, I avoid stocks which have a high short position, and I do look for a current ratio above 2. Oh, and the stock should be near it's 52 week low, although I'm not as stubborn about that criterion. My goal is to hold 20 stocks, as I've realized it's a lot of work, so 30 would be too much.

Also, I use zecco, which gives me 10 free trades a month.

There are some issues with the list, I'll admit. Its supposed to exclude stocks with one time gains, but doesn't always. It's also not supposed to include foreign companies, but I notice Chinese stocks show up once in a while.

Remember, you are collecting 20-30 stocks, spread across different industries. That's a lot, and it's reasonably diversified.

Hope that helps.

]]> By: S. http://thefinancebuff.com/2007/08/magic-formula-investing-will-it-work.html/comment-page-1#comment-336 S. Tue, 04 Dec 2007 15:35:00 +0000 http://blog.thefinancebuff.com/?p=147#comment-336 The problem with this magic formula is that it does not prevent you from selecting losers. It's a pure statistic method which, as far as we are concerned, is open to further improvement.<br/><br/>Determining which stocks are undervalued or which are justly beaten up, is a very difficult task, which we believe is best executed by people who know the company very well, the insiders. Therefore, we track the insider tradings of the companies in the Top 25 list of the Magic Formula, and publish them on a regular base on this site:<br/><br/>http://magicformulainsidetraders.blogspot.com/<br/><br/>What's even more important about inside tradings is that when executives bought shares in their own companies, the stock tended to outperform the total market by 8.9% over the next 12 months. Conversely when they sold shares, the stock underperformed the market by 5.4% (Nejat Seyhun, a renowned professor and researcher in the field of insider trading at the University of Michigan). The problem with this magic formula is that it does not prevent you from selecting losers. It's a pure statistic method which, as far as we are concerned, is open to further improvement.

Determining which stocks are undervalued or which are justly beaten up, is a very difficult task, which we believe is best executed by people who know the company very well, the insiders. Therefore, we track the insider tradings of the companies in the Top 25 list of the Magic Formula, and publish them on a regular base on this site:

http://magicformulainsidetraders.blogspot.com/

What's even more important about inside tradings is that when executives bought shares in their own companies, the stock tended to outperform the total market by 8.9% over the next 12 months. Conversely when they sold shares, the stock underperformed the market by 5.4% (Nejat Seyhun, a renowned professor and researcher in the field of insider trading at the University of Michigan).

]]> By: Sam http://thefinancebuff.com/2007/08/magic-formula-investing-will-it-work.html/comment-page-1#comment-318 Sam Fri, 23 Nov 2007 14:29:00 +0000 http://blog.thefinancebuff.com/?p=147#comment-318 Hi,<br/><br/>If you want to know how the Magic Formula holds up on European markets, visit my blog. <br/>I can say that even is this bad period it isn't bad, with hardly no effort.<br/><br/>And it doesn't matter that much that they are small caps, just that they are good companies. Anyway if you feel like visiting the blog here is the adres. investingeuro.blogspot.com Hi,

If you want to know how the Magic Formula holds up on European markets, visit my blog.
I can say that even is this bad period it isn't bad, with hardly no effort.

And it doesn't matter that much that they are small caps, just that they are good companies. Anyway if you feel like visiting the blog here is the adres. investingeuro.blogspot.com

]]> By: Anonymous http://thefinancebuff.com/2007/08/magic-formula-investing-will-it-work.html/comment-page-1#comment-287 Anonymous Sat, 27 Oct 2007 21:59:00 +0000 http://blog.thefinancebuff.com/?p=147#comment-287 Couple of problems with your post. <br/>1) If you are setting the minimum market cap at 100 million, you will naturally get small cap stocks to show up. If you set it higher, you won't. Regardless, historically speaking, small cap value stocks outperform most other segments of the market<br/><br/>2) The experience of other individuals who you comment on, is over a very brief period of time. Greenblatt realizes there may be a couple of bad years in a row, but encourages the investor to hang on to the formula. In his book, he claims that when looking at 3 year rolling returns, there was never a loss and the market average and S&P were both beaten. <br/><br/>3) You say if you are beating the averages, something is wrong. <br/>But isn't that the point of value investing - essentially you are saying the concept of value investing as a whole is null and void, and that the efficient market theorists are correct. If you feel that way, just stick to an S&P index fund. Couple of problems with your post.
1) If you are setting the minimum market cap at 100 million, you will naturally get small cap stocks to show up. If you set it higher, you won't. Regardless, historically speaking, small cap value stocks outperform most other segments of the market

2) The experience of other individuals who you comment on, is over a very brief period of time. Greenblatt realizes there may be a couple of bad years in a row, but encourages the investor to hang on to the formula. In his book, he claims that when looking at 3 year rolling returns, there was never a loss and the market average and S&P were both beaten.

3) You say if you are beating the averages, something is wrong.
But isn't that the point of value investing – essentially you are saying the concept of value investing as a whole is null and void, and that the efficient market theorists are correct. If you feel that way, just stick to an S&P index fund.

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