Does Magic Formula works or ever worked for you?

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imlearner
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Does Magic Formula works or ever worked for you?

Post by imlearner » Sun Jun 19, 2016 5:08 pm

I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?

livesoft
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Re: Does Magic Formula works or ever worked for you?

Post by livesoft » Sun Jun 19, 2016 5:11 pm

Here is a thread where someone tried it: http://www.early-retirement.org/forums/ ... 74510.html
Let's just say, it has not gone well.
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Re: Does Magic Formula works or ever worked for you?

Post by Phineas J. Whoopee » Sun Jun 19, 2016 5:13 pm

Does he show evidence he picked those stocks, and not too many others, in advance, a decade ago? Anybody can pretend to have been right after the fact.
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nisiprius
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Re: Does Magic Formula works or ever worked for you?

Post by nisiprius » Sun Jun 19, 2016 7:49 pm

Whenever I read about one of these stock-picking strategies, I always wonder why you have to do it yourself through individual stocks and advisory services. If it works, why doesn't someone package it in the form of a mutual fund? The answer, of course, that sometimes people do--but the funds don't usually survive.

At one time, for example, there were a good handful of mutual funds that implemented (various variations on) the "Dogs of the Dow" strategy. None of them exist any more.

Greenblatt created or advised or was otherwise associated with a firm that, for several years, offered the "magic formula" in the form of mutual funds. The company was called simply "Formula Investing" (for some reason they didn't use the word "magic"). The funds existed for something like three years, then were all discontinued. The story isn't completely clear, because people say some of the funds were actually doing well, but it all sounds like a red flag to me.

To me, the existence of a mutual fund embodying the strategy is a definite credibility factor. It means, for one thing, that the fund managers have to follow the SEC regulations for mutual funds, maintain liquidity and so forth. It means, for another thing, that the strategy is out there, with real money, implemented by professionals, so if the fund doesn't do well nobody can say that it wasn't doing it right.

If Magic Formula investing is easy, sound, and reliable, why can't you buy the strategy in mutual fund form?
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nisiprius
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Re: Does Magic Formula works or ever worked for you?

Post by nisiprius » Sun Jun 19, 2016 8:00 pm

Apparently Greenblatt's Magic Formula did not work for Joel Greenblatt. I'm not sure who said in the forum that the Greenblatt "Formula Investing" funds had done well, but according to this article, "None of his funds have outperformed the S&P 500's total return since their inception."

http://www.forbes.com/sites/antoinegara ... bb6dee3231

(Since this is apparently a new edition of his older book, one thing I'd be very careful about: is this the same "magic formula" he was writing about earlier? You need to watch out for the "formula" that is being constantly revised and "improved" with time; basically, whenever an formula fails, due to some really unusual anomalous market behavior, it is easy to "fix" the formula by adding a new clause that would have prevented the problem, so that the latest version of the strategy always performs well in backtesting. That's just some freefloating skepticism as I haven't read the book, but the problem definitely exists with "Dogs of the Dow" and with the "Harry Dent Permanent Portfolio," which got revised over time, with enthusiasts showing only the backtest results of the most recent revision.")
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Taylor Larimore
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The oldest marketing scheme.

Post by Taylor Larimore » Sun Jun 19, 2016 8:44 pm

imlearner wrote:I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?

imlearner:

One of the oldest (and most effective) scheme to sell a stock, mutual fund, investment book, newsletter, advisory service, etc., is to pick a fund or collection of funds that outperformed during a past period, combine them into a portfolio, and suggest this made-up portfolio of past winners will outperform in the future.

The problem is that Past Performance Does Not Forecast Future Performance. The government requires mutual fund companies to tell you that.

If you want to read a "Little Book," Read Jack Bogle's "Little Book of Common Sense Investing."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Does Magic Formula works or ever worked for you?

Post by niven » Sun Jun 19, 2016 9:34 pm

imlearner wrote:I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?

To me, the question is could you do this with enough confidence to bet a large sum of money many times (assuming you don't go broke first) so that you become fabulously wealthy? If not, why would you attempt it? Living below your means, saving and investing and keeping costs low and investments diversified is much more likely to yield a good result.

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Re: Does Magic Formula works or ever worked for you?

Post by njoyingdajourney » Mon Jun 20, 2016 12:47 am

imlearner wrote:I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?


I have listened to the book twice via Audible. Many years back, I did use his screen to pick couple individual stocks. I did not apply his formula. Nike was on the list as were some others. Nike has done very well. Some of the other ones have not done so well.

This is another good read on Magic Formula Investing. I think the screen does working in picking undervalued stocks. I plan to use Magic Formula Investing via Robin Hood (free trades). I haven't decided percent of my money I plan to invest. I think the ride can be pretty wild over 3 to 5 years. I'm ok with that. One thing he does say in his book is that mutual funds typically cannot survive the 3 to 5 year ride because investors will not keep investing. Also, after reading about Gotham, I'm not sure but seemed like he was also shorting. I have been curious why I have not seen a magic Formula Mutual Fund. If the fees were low, I'd do that. Or At least be able to see the returns over time.

http://www.oldschoolvalue.com/blog/inve ... investing/
http://www.oldschoolvalue.com/stock-screener.php

One question I do have. Does anyone know how much more paperwork it would be to trade 20 stocks. Sell the losers on day 364 and sell the winners on day 366 for my tax preparer? I'm not gonna be trading millions of dollars and don't want my tax preparer me more.
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Re: Does Magic Formula works or ever worked for you?

Post by quantAndHold » Mon Jun 20, 2016 1:10 am

nisiprius wrote:
(Since this is apparently a new edition of his older book, one thing I'd be very careful about: is this the same "magic formula" he was writing about earlier?


Yes, it is the same formula. The main difference between editions was that somewhere between editions he came to the realization of how hard it is for people to follow instructions, especially when there's money involved. Like the guy who was linked to earlier in this thread, who cherry picked a few stocks from the list, held them for a few months, and gave up because he wasn't rich yet. The instructions very clearly and repeatly say longer timeline, don't cherry pick, and so on. So there's an extra chapter at the end warning people about exactly that.

So the scoop on the magic formula is that it has beat the market over the long haul, but nobody can figure out how Greenberg got the results in the book, because nobody else's backtests do that well (although they do generally do better than the market). But...the magic formula has not done as well after the book was published as it did before, and like every other type of value investing, it has done poorly in the past few years. Which makes it really hard to stick with. I suspect it will do much better once everyone gives up on it ever working again, sells out, and invests in something else.

There's a bunch of these kind of "paint by the numbers" stock picking methods. O'Shaughnessy's "What Works on Wall Street" has like 20 of them. Some of them work better than the magic formula, but the magic formula has the advantage that there's a website that will tell you exactly what to buy. With some patience and a reasonably long time horizon, yes, many of these can work. But none of them are guaranteed to work over short time horizons, and most people give up as soon as they don't work for a year, because they can't live with the tracking error.

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Re: Does Magic Formula works or ever worked for you?

Post by quantAndHold » Mon Jun 20, 2016 1:38 am

nisiprius wrote:Apparently Greenblatt's Magic Formula did not work for Joel Greenblatt. I'm not sure who said in the forum that the Greenblatt "Formula Investing" funds had done well, but according to this article, "None of his funds have outperformed the S&P 500's total return since their inception."

http://www.forbes.com/sites/antoinegara ... bb6dee3231


Greenblatt's funds aren't doing Magic Formula. They're all doing a long/short strategy, with various amounts of longness and shortness and leverage.

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Re: Does Magic Formula works or ever worked for you?

Post by BL » Mon Jun 20, 2016 1:54 am

If I were interested, I would simply buy Berkshire Hathaway by the guy who buys businesses, Warren Buffett. Not sure that will last either, as he is getting old, and past performance does not necessarily predict future performance anyway.

imlearner
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Re: The oldest marketing scheme.

Post by imlearner » Mon Jun 20, 2016 7:26 am

Taylor Larimore wrote:
imlearner wrote:I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?

imlearner:

One of the oldest (and most effective) scheme to sell a stock, mutual fund, investment book, newsletter, advisory service, etc., is to pick a fund or collection of funds that outperformed during a past period, combine them into a portfolio, and suggest this made-up portfolio of past winners will outperform in the future.

The problem is that Past Performance Does Not Forecast Future Performance. The government requires mutual fund companies to tell you that.

If you want to read a "Little Book," Read Jack Bogle's "Little Book of Common Sense Investing."

Best wishes.
Taylor


Taylor, You are correct.
I have actually picked Bogle's "Common Sense on Mutual funds". Picking stocks is risky and someone like me not only lacks time but extensive knowledge to do it right. So I guess I would leave it to pros and make my way through mutual funds.

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Re: Does Magic Formula works or ever worked for you?

Post by imlearner » Mon Jun 20, 2016 7:27 am

niven wrote:
imlearner wrote:I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?

To me, the question is could you do this with enough confidence to bet a large sum of money many times (assuming you don't go broke first) so that you become fabulously wealthy? If not, why would you attempt it? Living below your means, saving and investing and keeping costs low and investments diversified is much more likely to yield a good result.


I agree that's a risky business.

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Re: Does Magic Formula works or ever worked for you?

Post by ryman554 » Mon Jun 20, 2016 8:04 am

nisiprius wrote:Whenever I read about one of these stock-picking strategies, I always wonder why you have to do it yourself through individual stocks and advisory services. If it works, why doesn't someone package it in the form of a mutual fund? The answer, of course, that sometimes people do--but the funds don't usually survive.

...

If Magic Formula investing is easy, sound, and reliable, why can't you buy the strategy in mutual fund form?


Good comment. However, no matter how good the strategy is/was, could you not say that no (open) mutual fund could ever succeed with one? After all, you are describing "chasing alpha", and there is only so much of that to go around.

Most of these stock picking things look to find the little inefficiencies in the market. You get more $$ pointed at these inefficiencies, doesn't that undo it? More $$ at less inefficient markets means worse alpha and lower returns.

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Re: Does Magic Formula works or ever worked for you?

Post by cheese_breath » Mon Jun 20, 2016 9:01 am

When I saw "Magic Formula" in the title I thought this might be another weight loss product. And maybe it is after all. You could end up with a lighter wallet when you're done with it.
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Re: Does Magic Formula works or ever worked for you?

Post by njoyingdajourney » Tue Jun 21, 2016 11:46 pm

quantAndHold wrote:
nisiprius wrote:
(Since this is apparently a new edition of his older book, one thing I'd be very careful about: is this the same "magic formula" he was writing about earlier?


So the scoop on the magic formula is that it has beat the market over the long haul, but nobody can figure out how Greenberg got the results in the book, because nobody else's backtests do that well (although they do generally do better than the market). But...the magic formula has not done as well after the book was published as it did before, and like every other type of value investing, it has done poorly in the past few years.

There's a bunch of these kind of "paint by the numbers" stock picking methods. O'Shaughnessy's "What Works on Wall Street" has like 20 of them. Some of them work better than the magic formula, but the magic formula has the advantage that there's a website that will tell you exactly what to buy. With some patience and a reasonably long time horizon, yes, many of these can work. But none of them are guaranteed to work over short time horizons, and most people give up as soon as they don't work for a year, because they can't live with the tracking error.


Have you used magic formula? Any success? Which formulas do you think are better?

I've seen some stocks stuck on magic formula list forever. Wonder if stocks that Just make it onto list would be more likely to increase in price and go off the list? Best way to backtest my own theories?

Also if stocks with a market cap under 50 million using same magic formula criteria would be more profitable? Web site has minimum $50 million. So $25M to $50M maybe.

It seems like it wouldn't be that hard to backtest this? or for Greenblatt to show his numbers.
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Re: Does Magic Formula works or ever worked for you?

Post by itstoomuch » Wed Jun 22, 2016 12:16 am

What? If you are a stock picker, isn't one of the principles of stock investment is to buy Value stocks (low price) and wait until the stock becomes full valued (higher price) :?: :idea:

Some people are better at selecting stocks than others. Most do less than the "average", which of course makes the average, Average.
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Re: Does Magic Formula works or ever worked for you?

Post by njoyingdajourney » Wed Jun 22, 2016 12:22 am

itstoomuch wrote:What? If you are a stock picker, isn't one of the principles of stock investment is to buy Value stocks (low price) and wait until the stock becomes full valued (higher price) :?: :idea:

Some people are better at selecting stocks than others. Most do less than the "average", which of course makes the average, Average.
:greedy


stock picker = mutual fund manager? then your job is to keep as many people invested. I would guess mutual fund managers are aware of at what point people will flee.

Most do less than the "average", which of course makes the average, Average.
Wouldn't that make most be below average?
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Re: Does Magic Formula works or ever worked for you?

Post by itstoomuch » Wed Jun 22, 2016 12:31 am

^^
Most do less than the "average", which of course makes the average, Average.
Wouldn't that make most be below average?


which is the conundrum of stock picking and Vanguard's secret. Vanguard doesn't need to be good, just better than bad. :oops:
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Re: Does Magic Formula works or ever worked for you?

Post by joer1212 » Sat May 06, 2017 4:09 pm

livesoft wrote:Here is a thread where someone tried it: http://www.early-retirement.org/forums/ ... 74510.html
Let's just say, it has not gone well.
In all fairness, the experiment was only 9 months old. Hardly long enough to be conclusive.

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Re: Does Magic Formula works or ever worked for you?

Post by nisiprius » Sat May 06, 2017 5:16 pm

quantAndHold wrote:
nisiprius wrote:Apparently Greenblatt's Magic Formula did not work for Joel Greenblatt. I'm not sure who said in the forum that the Greenblatt "Formula Investing" funds had done well, but according to this article, "None of his funds have outperformed the S&P 500's total return since their inception."

http://www.forbes.com/sites/antoinegara ... bb6dee3231
Greenblatt's funds aren't doing Magic Formula. They're all doing a long/short strategy, with various amounts of longness and shortness and leverage.
I don't know anything about his current fund family, Gotham funds. Those are not the Formula Investing funds. As I said, the Formula Investing funds were all terminated and don't exist any more. They were described by the press as being implementations of the Magic Formula. Since I didn't have much interest in them I didn't read the prospectus or dig into them myself so perhaps the press reports were just plain wrong. Typical story: "Magic Formula Investing" Conjures Up 4 New Stock Funds
Steven Goldberg in Kiplinger's wrote:Now the book that morphed into a web site has birthed four mutual funds, two domestic and two foreign. Each fund invests in stocks and hopes to beat its relevant market using Greenblatt’s formula.
On further digging, the archive.org Wayback Machine offers this web page, captured in 2011, from the http://www.formulainvesting.com website:Web page as of December 22, 2011
Formula Investing Funds (each a series of BNY Mellon's FundVantage Trust) were created to provide investors access to Joel Greenblatt's value weighted investing methodologies...
Formula Investing U.S. Value 1000 (Symbol FVVAX)

This fund selects 800 – 1000 stocks from the 1400 U.S. stocks with the largest market capitalizations. Stocks are selected and weighted most heavily toward those stocks that are priced at the largest discount to various measures of value. These measures may include assessments of earnings yield and return on capital as well as other value factors....
Another page gives more detail. It's straight stock selection, no short positions or leverage mentioned. Archive.org appears to have actually captured the prospectus, and, again, this statement seems clear:
The investment strategy used by the Fund is unlike indexing strategies that use stock market capitalization as the basis for portfolio construction. By investing in a portfolio of approximately 800-1000 securities weighted by the Adviser’s assessment of fundamental value, as opposed to market capitalization, the Adviser believes the Fund’s portfolio will be weighted in favor of companies that present stronger fundamental characteristics and may outperform a market capitalization-weighted portfolio from the same universe of securities. The Adviser has conducted proprietary research that suggests that to the extent securities are mispriced in the stock market, such mispricing could cause capitalization-weighted indices to overweight or underweight constituent securities relative to their fair value. The Adviser attempts to mitigate potential stock pricing errors by compiling a portfolio based on certain fundamental metrics of each company’s relative value rather than stock market capitalization.
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Re: Does Magic Formula works or ever worked for you?

Post by Chip » Sun May 07, 2017 5:36 am

njoyingdajourney wrote:One question I do have. Does anyone know how much more paperwork it would be to trade 20 stocks. Sell the losers on day 364 and sell the winners on day 366 for my tax preparer? I'm not gonna be trading millions of dollars and don't want my tax preparer me more.
First of all, you shouldn't do this. I like Dr. Bill Bernstein's take on it: "Trading individual stocks is like playing tennis against an invisible opponent; what the investor doesn't realize is that he's volleying with the Williams sisters."

That said, the additional tax return complexity isn't too bad. The IRS allows summarized results for trades in covered securities (cost basis reported to the IRS). 20 trades, some short, some long, would result in 2 entries on Schedule D. So would 100 trades. It's especially simple if all trades are at one broker.

Almost any stock purchased since 2011 is a covered security.

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Re: The oldest marketing scheme.

Post by chw » Sun May 07, 2017 5:58 am

Taylor Larimore wrote:
imlearner wrote:I just finished reading Joel Greenblatt's book The Little Book That still Beats the Market. The whole idea is to buy a GOOD business for LOW price, and sell it after holding it for some time. Idea sounds good and he proves it with stats from past decade or so.
If you have read this book, did this formula work for you? Or any modification you did to his formula to make it work?
imlearner:

One of the oldest (and most effective) scheme to sell a stock, mutual fund, investment book, newsletter, advisory service, etc., is to pick a fund or collection of funds that outperformed during a past period, combine them into a portfolio, and suggest this made-up portfolio of past winners will outperform in the future.

The problem is that Past Performance Does Not Forecast Future Performance. The government requires mutual fund companies to tell you that.

If you want to read a "Little Book," Read Jack Bogle's "Little Book of Common Sense Investing."

Best wishes.
Taylor
+1 You can't get better advice than this regarding this subject- especially from someone who has seen many decades of investing schemes that just don't hold,up over time against a simple indexed approach to investing using low cost funds.

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Re: Does Magic Formula works or ever worked for you?

Post by SpaceCommander » Sun May 07, 2017 7:37 am

Marsh Gerda has been applying the Magic Formula in real time and posting his results in public for years. His MFI Select portfolios have shown strong outperformance. His strict Magic Formula "buy 50 and hold for a year" portfolios have consistently trailed.

http://justadrone.blogspot.com/
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Re: Does Magic Formula works or ever worked for you?

Post by NYCguy » Sun May 07, 2017 8:02 am

This is no more a formula then "buy low and sell high". The false promise is that you can beat the market.

If you must try this, hopefully you are young, do it with a small amount of money and will be mature enough to recognize your mistake.
If your out-go is greater than your income, your upkeep will be your DOWNFALL.

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Re: Does Magic Formula works or ever worked for you?

Post by nisiprius » Sun May 07, 2017 8:34 am

SpaceCommander wrote:Marsh Gerda has been applying the Magic Formula in real time and posting his results in public for years. His MFI Select portfolios have shown strong outperformance. His strict Magic Formula "buy 50 and hold for a year" portfolios have consistently trailed.

http://justadrone.blogspot.com/
Which Magic Formula is the real Magic Formula?
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Re: Does Magic Formula works or ever worked for you?

Post by NYCguy » Sun May 07, 2017 9:12 am

nisiprius wrote:
SpaceCommander wrote:Marsh Gerda has been applying the Magic Formula in real time and posting his results in public for years. His MFI Select portfolios have shown strong outperformance. His strict Magic Formula "buy 50 and hold for a year" portfolios have consistently trailed.

http://justadrone.blogspot.com/
Which Magic Formula is the real Magic Formula?
The one that beats the market. :D
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Re: Does Magic Formula works or ever worked for you?

Post by Hawaiishrimp » Sun May 07, 2017 10:55 am

I have tried that years ago, did not work for me.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Re: Does Magic Formula works or ever worked for you?

Post by SpaceCommander » Sun May 07, 2017 4:17 pm

nisiprius wrote:
SpaceCommander wrote:Marsh Gerda has been applying the Magic Formula in real time and posting his results in public for years. His MFI Select portfolios have shown strong outperformance. His strict Magic Formula "buy 50 and hold for a year" portfolios have consistently trailed.

http://justadrone.blogspot.com/
Which Magic Formula is the real Magic Formula?
Gerda's results speak for themselves. If you bother to check out his site, you can see his real time returns. If one was inclined to stockpick, you could do much worse. FWIW,
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Re: Does Magic Formula works or ever worked for you?

Post by nisiprius » Sun May 07, 2017 5:25 pm

SpaceCommander wrote:
nisiprius wrote:
SpaceCommander wrote:Marsh Gerda has been applying the Magic Formula in real time and posting his results in public for years. His MFI Select portfolios have shown strong outperformance. His strict Magic Formula "buy 50 and hold for a year" portfolios have consistently trailed.

http://justadrone.blogspot.com/
Which Magic Formula is the real Magic Formula?
Gerda's results speak for themselves. If you bother to check out his site, you can see his real time returns. If one was inclined to stockpick, you could do much worse. FWIW,
It's a serious question that deserves a real answer. You say that there are two Magic Formulas, and that in a real-world test by a serious investor one of them outperformed and one of them underperformed.

So if I am interested in following the Magic Formula, I'm faced with the same problem as in picking stocks. There is no "the Magic Formula." There are two, and I have to pick one of them. It appears as if, had I started using a Magic Formula at the same time as Marsh Gerda, that I would have had a coin-flip chance of underperforming the market.

Where is the Magic Formula that tells me which Magic Formula to pick?
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Re: Does Magic Formula works or ever worked for you?

Post by stlutz » Sun May 07, 2017 9:16 pm

You say that there are two Magic Formulas, and that in a real-world test by a serious investor one of them outperformed and one of them underperformed.
From the linked blog:
I have been tracking the Magic Formula Stocks as described by Joel Greenblatt in The Little Book That Beats the Stock Market since January 2006. Every month I take the top 50 stocks over $100m market cap from his website and track how that portfolio of stocks fares versus the Russell 3000 for the next 12 months. It has been an uphill struggle as the tracking portfolios have under-performed, driven in part by Chinese reverse merger fiascos, for-profit education stocks and home health care stocks all being proverbial albatrosses.
http://justadrone.blogspot.com/search?u ... date=false

The set that has outperformed is the culled list that the author has been selecting for the past 5 years or so.

In short, the quantitative "factor strategy" hasn't worked, but the "actively managed" strategy using human intelligence apparently has.

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Re: Does Magic Formula works or ever worked for you?

Post by unclescrooge » Sun May 07, 2017 11:19 pm

nisiprius wrote:
quantAndHold wrote:
nisiprius wrote:Apparently Greenblatt's Magic Formula did not work for Joel Greenblatt. I'm not sure who said in the forum that the Greenblatt "Formula Investing" funds had done well, but according to this article, "None of his funds have outperformed the S&P 500's total return since their inception."

http://www.forbes.com/sites/antoinegara ... bb6dee3231
Greenblatt's funds aren't doing Magic Formula. They're all doing a long/short strategy, with various amounts of longness and shortness and leverage.
I don't know anything about his current fund family, Gotham funds. Those are not the Formula Investing funds. As I said, the Formula Investing funds were all terminated and don't exist any more. They were described by the press as being implementations of the Magic Formula. Since I didn't have much interest in them I didn't read the prospectus or dig into them myself so perhaps the press reports were just plain wrong. Typical story: "Magic Formula Investing" Conjures Up 4 New Stock Funds
Steven Goldberg in Kiplinger's wrote:Now the book that morphed into a web site has birthed four mutual funds, two domestic and two foreign. Each fund invests in stocks and hopes to beat its relevant market using Greenblatt’s formula.
On further digging, the archive.org Wayback Machine offers this web page, captured in 2011, from the http://www.formulainvesting.com website:Web page as of December 22, 2011
Formula Investing Funds (each a series of BNY Mellon's FundVantage Trust) were created to provide investors access to Joel Greenblatt's value weighted investing methodologies...
Formula Investing U.S. Value 1000 (Symbol FVVAX)

This fund selects 800 – 1000 stocks from the 1400 U.S. stocks with the largest market capitalizations. Stocks are selected and weighted most heavily toward those stocks that are priced at the largest discount to various measures of value. These measures may include assessments of earnings yield and return on capital as well as other value factors....
Another page gives more detail. It's straight stock selection, no short positions or leverage mentioned. Archive.org appears to have actually captured the prospectus, and, again, this statement seems clear:
The investment strategy used by the Fund is unlike indexing strategies that use stock market capitalization as the basis for portfolio construction. By investing in a portfolio of approximately 800-1000 securities weighted by the Adviser’s assessment of fundamental value, as opposed to market capitalization, the Adviser believes the Fund’s portfolio will be weighted in favor of companies that present stronger fundamental characteristics and may outperform a market capitalization-weighted portfolio from the same universe of securities. The Adviser has conducted proprietary research that suggests that to the extent securities are mispriced in the stock market, such mispricing could cause capitalization-weighted indices to overweight or underweight constituent securities relative to their fair value. The Adviser attempts to mitigate potential stock pricing errors by compiling a portfolio based on certain fundamental metrics of each company’s relative value rather than stock market capitalization.

It's been many years since I read the book, but I definitely remember the idea is to hold maybe 50 stocks. If you're going to hold 1,000 you might as well invest in VTV, Vanguard's slightly valuey index fund.

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Re: Does Magic Formula works or ever worked for you?

Post by bawr » Mon May 08, 2017 3:36 am

I use a variation of the magic formula with some additional filters (*) to reduce the probability of accounting fraud and bankruptcies. It works.

I am researching yet another variation which is intended to improve the quality factor in the strategy. I don't have any longer term results to report yet. Maybe in a few years ...

You need a certain kind of temperament to implement such strategies. Most people don't have the required disposition, so they are better off sticking to a preferably automated, passive strategy, as exemplified by the Boglehead approach. To outperform in investing, you need to be wired weird.

(*) The additional filters are the Beneish M-score, the Altman Z-score, and the Piotroski f-score.

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Re: Does Magic Formula works or ever worked for you?

Post by bottlecap » Mon May 08, 2017 5:51 am

Finding "good" companies whose stocks will do well "after some time" and buying their stock at low prices and selling at high prices is truly the key to active stock picking.

If only I had thought of that before Greenblatt, I would have written a book and not him!

JT

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Re: Does Magic Formula works or ever worked for you?

Post by SpaceCommander » Mon May 08, 2017 4:52 pm

nisiprius wrote:
SpaceCommander wrote:
nisiprius wrote:
SpaceCommander wrote:Marsh Gerda has been applying the Magic Formula in real time and posting his results in public for years. His MFI Select portfolios have shown strong outperformance. His strict Magic Formula "buy 50 and hold for a year" portfolios have consistently trailed.

http://justadrone.blogspot.com/
Which Magic Formula is the real Magic Formula?
Gerda's results speak for themselves. If you bother to check out his site, you can see his real time returns. If one was inclined to stockpick, you could do much worse. FWIW,
It's a serious question that deserves a real answer. You say that there are two Magic Formulas, and that in a real-world test by a serious investor one of them outperformed and one of them underperformed.

So if I am interested in following the Magic Formula, I'm faced with the same problem as in picking stocks. There is no "the Magic Formula." There are two, and I have to pick one of them. It appears as if, had I started using a Magic Formula at the same time as Marsh Gerda, that I would have had a coin-flip chance of underperforming the market.

Where is the Magic Formula that tells me which Magic Formula to pick?
You said it was a serious question that deserves a real answer. I respect that. So in brief:

It is apparent that you haven't read Greenblatt. Otherwise, you'd see that there are not 2 Magic Formulas. The so called "Magic Formula" is really just a simple screen. For backtesting purposes, Greenblatt mechanically bought the entire group of the top 30 or 50 stocks in the screen. However, when it comes to applying the method with real money, that is NOT his recommended strategy. He encourages the investor to leg into the portfolio by adding 5-7 new issues every other month or so until working up to a recommended position size of 30+ stocks.

The screen at magicformulainvesting.com does not rank the stocks that pass the screen. Otherwise there would be a rush for the top handful of stocks. So the screen merely lists in alphabetical order the top 30 or 50 stocks that pass the screen. So how does one narrow that list down to the final 5-7 picks? Greenblatt recommends on page 111 to "choose a few of your favorites by whatever method you want. You must, however, choose solely from the top 50..."

Marsh Gerda keeps performance records of both approaches. Merely buying all of the top 50 stocks (as Greenblatt did for backtesting purposes), and the method he uses for his own money (the more selective approach). Note that Gerda does no qualitative analysis on his picks, but uses a RANDOMIZER to narrow the list mechanically! Greenblatt urges the investor not to get too fancy with additional analysis. Whichever method one uses, in the end he will be fully invested in Magic Formula picks, and (according to Greenblatt) will do just fine over the long term.

So if one wants to remove any selection bias, you could simply adopt Gerda's approach. And Gerda's performance record is eyebrow raising, for sure.

FWIW,
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Re: Does Magic Formula works or ever worked for you?

Post by humblepie2 » Sun Jul 09, 2017 7:34 am

Greenblatt is a principal of Gotham Funds, I believe. Sure, past performance isn't indicative of future returns. That's good, because his past performance doesn't look so good. I'm happy to say I've never handed over any money to him or the methodology in his little book.

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Re: Does Magic Formula works or ever worked for you?

Post by TheGodson » Tue Nov 14, 2017 2:24 am

This thread is old, but this formula isn't all that great. I was planning on doing this for 3 years, but it has vastly underperformed the market. The third year would have to be oh so very high in order to beat the market. I'm going to do what I should have done long ago. Invest in ETFs. All the vanguard, S&P, DowJones, etc... stuff does well. I believe it will continue to in the long run.

Well, if I choose to buy a stock, I'll at least pick stocks based on my own research rather than someone telling me it is good.

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Re: Does Magic Formula works or ever worked for you?

Post by msk » Tue Nov 14, 2017 2:52 am

I spent the last 3 decades of my stock investment life split roughly 50:50 on developed markets and a very tiny market (highly inefficient) in a country I happened to live in. Conclusions:

Stock picking does not work in large markets. I enjoyed SPY and BRK for decades and hardly kept up with stock picking and even options. Options are the way to go if you want to play the stock picking game. Best is to stay with ETFs (+options if you must indulge).

Stock picking does work in tiny markets. But you have to have confidence in your reading of quarterly reports and staying the course over multiple years. Each quarter you have to decide whether you go deeper into each of your picks or pull out. At one time I had slowly gone into one stock at, say $50k to $100k each time, over years till I had put in some $1 million into it alone. By then my holding was worth > $3 million. Sold off $2 million because I felt it was an insane concentration on one stock. Other picks were more sanguine, hence less money making. Unless you have the confidence to put a major portion of your NW onto a tiny handful of picks, you are never going to substantially impact your future wealth. Don't try this in any large, mostly efficient market. Unhealthy results assured.

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Re: Does Magic Formula works or ever worked for you?

Post by nisiprius » Tue Nov 14, 2017 7:23 am

SpaceCommander wrote:
Mon May 08, 2017 4:52 pm
You said it was a serious question that deserves a real answer. I respect that. So in brief:

It is apparent that you haven't read Greenblatt. Otherwise, you'd see that there are not 2 Magic Formulas. The so called "Magic Formula" is really just a simple screen. For backtesting purposes, Greenblatt mechanically bought the entire group of the top 30 or 50 stocks in the screen. However, when it comes to applying the method with real money, that is NOT his recommended strategy. He encourages the investor to leg into the portfolio by adding 5-7 new issues every other month or so until working up to a recommended position size of 30+ stocks.

The screen at magicformulainvesting.com does not rank the stocks that pass the screen. Otherwise there would be a rush for the top handful of stocks. So the screen merely lists in alphabetical order the top 30 or 50 stocks that pass the screen. So how does one narrow that list down to the final 5-7 picks? Greenblatt recommends on page 111 to "choose a few of your favorites by whatever method you want. You must, however, choose solely from the top 50..."
So, it is not a formula for investing at all. It is just a formula for calculating numbers to prescreen a universe of stocks from which you personally pick stocks, and your success or failure depends on your personal picks.

He has not defined a testable or reproducible strategy, he has merely defined his own asset class or factor. Invest in high-Greenblatt stocks; build a portfolio with a high loading on the Greenblatt factor.

It is no different in principle from e.g. Peter Lynch in a 1995 article suggesting that you "You sink 100 percent of your investment capital into a portfolio of companies that pay regular dividends... you could select a few 'dividend achievers,' as identified by Moody’s." The claim is merely that Greenblatt has a better formula than "dividend achievers" or "value" for identifying a universe of promising stocks.

Has Greenblatt written anything publicly explaining the closure of the Formula Investing funds, and why that shouldn't bear on the credibility of Magic Formula investing?
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Re: Does Magic Formula works or ever worked for you?

Post by bgf » Tue Nov 14, 2017 5:53 pm

I've read his book and enjoyed it. I use his screener as a starting point for stock selection. I do not practice his overall strategy.

So far the stocks I have chosen from his screener over the years include:

Ebix - by far my best performer, have continually bought over the years and never sold a share; single best investment I've made
Microsoft - yep, it was on there back in the $30 range before Satya Nadella came on
Cisco - still actually on there and I've held for years, with solid returns
Inteliquent - acquired for cash a few months after I bought it for a like 50%+ gain
Qualcomm - purchased but sold for profit once all the litigation began dominating the story, collected 4% dividend along the way

IBM - the lone stinker

So far for me, it has worked well. Though I have to admit, Greenblatt argues in the book that you should simply purchase whatever is on the list regardless of your own analysis. He argues that trying to analyze and pick and choose companies on the list actually works counter to the strategy. He also tells you to reassess every year, which I have not done. IBM and Qualcomm were my only sales, and only IBM was for a loss (small). The others I have held and even added to over the years.

edit* i'd also like to add, that these purchases were made years ago, and the only purchases that I would make under my current strategy is Ebix and Inteliquent, as they were small caps that were not really followed. I wouldn't buy well known large caps even if they popped up on the screener.

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