Here’s a quick look at how the hypothetical Magic Formula portfolio performed in 2007:
The first set of purchases did quite well. Unfortunately, every purchase after that did poorly.
I think two things affected this portfolio’s performance:
1. Value stocks did poorly in 2007 (check out this post for details on index performance).
2. Small stocks did poorly in 2007.
Since the Magic Formula portfolio is composed of mostly of small cap value stocks, it shouldn’t be a big surprise that it underperformed the market in 2007.
It’s also important to note that this portfolio was quite volatile. At one point it was up over 26% on the year.
According to the formula, I’ll sell the first set of purchases and reinvest the money on January 7th. As with any strategy, you have to accept the good with the bad. I think Greenblatt’s strategy makes sense. However, we’ll just have to wait and see how it performs over the long run. I’ll post the new stocks next week.
If you would like to read up on the Magic Formula portfolio, check out these posts: