Bogleheads

mets96 · Joined: 04 May 2009 Posts: 43

I read the Magic formula by Joel Greenblatt last year and was interested in following this method of investing. The book and formula was pretty simple and basic so I'm just wondering if this is a good strategy for value investing?. If you are not familiar with it here is the criteria for the formula:

EmergDoc · Joined: 02 Mar 2007 Posts: 5474 Location: Home sweet home

Good luck with that.

I wouldn't follow the formula of anyone who considered 3 years to be long-term.

Also, seems like an awful lot of work and an awful lot of transaction costs.
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1) Invest you must 2) Time is your friend 3) Impulse is your enemy
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nisiprius · Posted: Fri Nov 20, 2009 3:23 pm Post subject:

Amazon "look inside the book," p. 48. emphasis supplied:

kyuss · Joined: 23 Feb 2007 Posts: 141

You'd be far better off just buying a concentrated mutual fund, it would save you a ton of time as well as transaction costs. Look at HCAIX or FFTYX or something like that.

mets96 · Joined: 04 May 2009 Posts: 43

Regarding transaction costs, I use Wells Fargo with 100 free trades a year

Dale_G · Posted: Fri Nov 20, 2009 5:51 pm Post subject:

Go for it. When this investment style in in favor, you will do okay. When it is not in favor - well not so good, so be prepared to stick with the philosophy for multi-year periods of under performance.

I don't see Joel Greenblatt's name on the Forbes 400 list, so I am not sure how magic his technique is.

Dale
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Mel Lindauer · Posted: Fri Nov 20, 2009 6:08 pm Post subject:

norookie · Joined: 07 Jul 2009 Posts: 404

CABob · Posted: Fri Nov 20, 2009 10:46 pm Post subject:

It is nothing that I am interesed in, but, if you want to learn some more you might check out the web site https://www.magicformulainvest....elcomeForm . Also a forum at The Motley Fool http://boards.fool.com/Messages.asp?bid=117512
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Bob

FrugalInvestor · Joined: 07 Nov 2008 Posts: 656

I think too many people consider investing to be "magic." It's not. But treating it that way may very well result in your money going "poof" and disappearing.
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"Complexity is easy; Simplicity is hard." -Edmund Kean

Adrian Nenu · Joined: 12 Apr 2007 Posts: 4012

Not magic but common sense:

Tolerable Loss x 2 = Equity Allocation < 50%

Anyone who does not address risk of loss cannot determine suitability.

Adrian
anenu@tampabay.rr.com

thedude · Joined: 07 Mar 2007 Posts: 195

I read that book when I first started thinking about investing. Then I read Swensen. I got the sense that Swensen's approach (as described in Unconventional Success) - the boglehead approach - is far more suitable for actually making money.

SP-diceman · Joined: 05 Oct 2008 Posts: 1010

nisiprius wrote:

nisiprius · Posted: Sat Nov 21, 2009 7:28 pm Post subject:

I didn't even spot the obvious question. If this formula is so straightforward to apply, doesn't incur unreasonable trading costs, and is so surefire, why is it a book instead of a mutual fund? That is, why isn't there a Magic Formula Mutual Fund?

Remember Dogs of the Dow? That was another simple, surefire formula. It had good face plausibility; it looked like an easy-to-implement value strategy. It worked like, well, magic for a while. There were several mutual funds implementing it. I don't think any of them are still around.
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stratton · Joined: 04 Mar 2007 Posts: 6747 Location: Puget Sound

Bernie Madoff had a "magic" formula too.

Paul

dkdoy · Joined: 13 Jun 2009 Posts: 203 Location: Oregon

Scott Rothstein also had his magic formula for growing wealth

Richard123 · Joined: 27 Feb 2007 Posts: 109

Yes, there is a Magic Formula.

It is Taylor's 4-Fund Portfolio. With Taylor you get it all! Broadest possible diversification through the bond, U.S. stock and foreign markets.

If you add anything else, i.e. REIT, SCV, you've got a portfolio bet which may or may not pan out over your investing career. Place the stock funds in your taxable, the bond funds in your tax-deferred and use intermediate term tax-exempt (vwiux) to round out the balance for your bonds. Just remember to apply Adrian's formula for your risk tolerance and you are done.

Anything else you add is a bet. Bets sometimes pay off and sometimes they don't. Also past history (on investment returns of sub-asset classes) may not come around again. So why bet? The mind cannot accept the Magic Formula because it is too simple.

Taylor Larimore · Posted: Sun Nov 22, 2009 12:02 pm Post subject: The real question

Hi Mets:

I have not read Mr. Greenblatt's book, but from your post it appears that he has a "magical formula" for picking stocks.

The REAL question should be, "Does it make sense to invest in individual stocks?" The best answer I've seen is by the author of "Mutual Funds for Dummies," Eric Tyson, who wrote:

dbonnett · Joined: 10 Jun 2008 Posts: 296

"picking individual stocks is like volleying with the Williams sisters"
-Bill Bernstein

swaption · Joined: 29 Jul 2008 Posts: 213

The self-congratulatory dismissal of this book is somewhat stunning. I invest much like most people here, in a well diversified, primarily passive portfolio. Having said that, I read this book on the recommendation of a friend in the business. Greenblatt is very well regarded. At the end of the day, the "magic formula" is nothing more than a passive filtering mechanism for value stocks. If this were dressed up as a DFA small value index or a new age fundamental index derived by some phd, then perhaps the commentary might be a little different. It's a quick read, perhaps some of you might endeavor to take a look and run the risk of actually learning something. There are other viable ways to skin the cat in the investing world.

FrugalInvestor · Joined: 07 Nov 2008 Posts: 656

smallcapvalue · Joined: 04 Jun 2009 Posts: 141

He follows his version of the Graham-Buffett-Tweedy approach - Value Investing. In the beginning of the book is just self-serving fluff. Overall, a few good ideas. However, I wouldn't use the approach for your entire portfolio. Instead- stock the the Bogglehead method as most have mentioned. The idea of using 5% (if you MUST) to play with isn't all that bad. But then would it make a difference? Probably not - which is why - stay the course!

smallcapvalue · Joined: 04 Jun 2009 Posts: 141

nisiprius · Posted: Mon Nov 23, 2009 8:11 pm Post subject:

jdmetz · Posted: Mon Nov 23, 2009 9:10 pm Post subject:

swaption · Joined: 29 Jul 2008 Posts: 213

bnw2001 · Joined: 16 Jan 2009 Posts: 220

traineeinvestor · Joined: 26 Nov 2008 Posts: 207 Location: Hong Kong

Assuming someone wants to prefers to put all or some of their money into a self selected portfolio and we get past the instinctive aversion to anything with the words "magic", "secret" or similar in it, the rules given below will probably not give an investor too much grief (there are plenty of less rigerous approaches out there). The biggest issues I would personally have is that there is nothing which filters out highly leveraged companies, companies with finite franchises and companies whose earnings are highly cyclical.

flyfisher_work · Joined: 05 Feb 2008 Posts: 49

If it were truly "magic", why would there be losers to sell?

junior · Joined: 10 Sep 2008 Posts: 328