Archives For Magic Formula Portfolio

Lily over at TheHonestDollar sent me an email last week alerting me to Fred Frailey’s article on the Magic Formula in the March issue of Kiplinger’s. Fred actually contacted me when he was working on the article but didn’t reference me in the finished product. Anyway, it’s a good article. I already knew that Fred was a fan of the Magic Formula when he mentioned the book and the formula in one of his editor’s columns.

The actual article is not yet available on the Kiplinger’s website but I wanted to go ahead and share with you a couple of interesting quotes from the article. Fred’s purpose of the article was to show how people aren’t following Greenblatt’s formula, which was explained in The Little Book That Beats The Market (Affiliate Link). From the article:

Had you followed Greenblatt’s instructions religiously between 1988 and 2004 by investing in the 30 highest-ranked stocks among all 3,500, you’d have earned an annualized 31%, or two and half times what Standard & Poor’s 500-stock index returned. Had you confined your investments to the 1,000 largest companies, you’d have earned 23% annulaized, twice the index’s gain.

…But Greenblatt, who as a professional investor knows a few things about investor psychology, foresaw a problem for buyer of his book who attempt to follow the Magic Formula plan: It doesn’t work all the time. On average, it works seven months out of every 12, and three out of every four calendar years.

In other words, it’s not going to beat the market every year. So, a formula that was designed to take the emotion out of investing, is being tweaked out of emotion. Believe it or not, according to Greenblatt, this is actually good news for followers of the formula:

…If every investor jumpted on the Magic Formula bandwagon, says Greenblatt, it would probably stop working because bargains would quickly disappear. But, he says, most people lose patience. They abandon the Magic Formula and go on to some other strategy or fad, leaving the bargains in place for those who persevere.

I’m with Greenblatt on this one. Value investing works, but it doesn’t work every year.

I have written quite a bit about the Magic Formula. If you are interested, you might want to check out these posts:

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

Magic Fomula Portfolio April Update

Magic Formula Portfolio May Update

Magic Formula Portfolio July Update

Magic Formula Portfolio August Update

Magic Formula Portfolio October Update

A Not-So-Good Year For the Magic Formula – A review of 2007’s performance.

Magic Formula Update – 2008’s First Purchase

I told you last week that I was going to make the first purchase for the portfolio this week. I was actually going to do this on Monday but was too busy. Here are the adjustments I made to the portfolio today:

I sold the first group of stocks that were purchased for the portfolio on January 5, 2007:

FreightCar America Inc
Aspreva Pharmaceuticals Corp
Freeport-McMoran Copper & Gold Inc.
OmniVision Technologies Inc
Fording Canadian Coal Trust

Including dividends, these positions netted $3,405 to be reinvested.

I then ran the screen on MagicFormulaInvesting.com, which gave me the following stocks:

Holly Corp (HOC)
SAIC Inc (SAI)
Perini Corp (PCR)
Korn/Ferry International (KFY)
Heidrick & Struggles International Inc (HSII) – Struggles? I’m not sure I like that name, LOL!

I then split the $3,405 evenly among those 5 stocks:

Magic Formula Portfolio - January 2008 Update

Now we’ll sit back and watch and see how these stocks perform. So far the Magic Formula is down 9.20% in 2008.

Here are the links to the rest of the Magic Formula posts:

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

Magic Fomula Portfolio April Update

Magic Formula Portfolio May Update

Magic Formula Portfolio July Update

Magic Formula Portfolio August Update

Magic Formula Portfolio October Update

A Not-So-Good Year For the Magic Formula – A review of 2007’s performance.

Here’s a quick look at how the hypothetical Magic Formula portfolio performed in 2007:

2007 Magic Formula Portfolio Performance

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:

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

Magic Fomula Portfolio April Update

Magic Formula Portfolio May Update

Magic Formula Portfolio July Update

Magic Formula Portfolio August Update

Magic Formula Portfolio October Update

I meant to do this at the close of the third quarter but didn’t get around to it. Anyway, here’s an update on the Magic Formula Portfolio.

Overall, the portfolio has done okay. This portfolio was up as much as 26% at one point during the year and down as much as -4%. So, it is very volatile, which is something to consider before utilizing this portfolio.

Here’s a look at the performance so far this year:

Magic Formula Portfolio

The stocks purchased at the beginning of the year have done quite well as opposed to the stocks purchased in July, which was right before the August swoon.

I’ll keep following this portfolio and give you updates every month or so. I’ll definitely do a year-end update so we can compare the portfolio’s performance with various benchmarks.

Stay tuned…

In the meantime, if you would like to read more about the Magic Portfolio, check out these posts:

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

Magic Fomula Portfolio April Update

Magic Formula Portfolio May Update

Magic Formula Portfolio July Update

Magic Formula Portfolio August Update

UPDATE: Just to give you an idea of how quickly this portfolio moves around, I refreshed my Excel spreadsheet and noticed that it is now up 6.51%. It was up 6.11% when I composed this post.

Well, since my last post on the Magic Formula Portfolio, it has been a rollercoaster ride. When I last reported on the formula on August 7, it was up 4% for the year. Since that time it actually went negative and now is now back up to a 6.11% gain for the year. This portfolio is not for the faint of heart and should only be used for a small portion of your investments – say 10% – 25%.

Here’s the portfolio arranged in order of performance: Continue Reading…

The Finance Buff’s post Magic Formula Investing: Will it Work? reminded me that I needed to give you guys a portfolio update.

Many of you know that I have been tracking a hypothetical portfolio that follows the advice recommended in Joel Greenblatt’s The Little Book That Beats The Market (Affiliate Link). For more information, see the posts listed below.

At one point this year the portfolio was up over 26%. That was BEFORE the market tumble of the past few weeks that hit the portfolio so hard as to render it nearly unconscious: Continue Reading…

As of this writing, the Magic Formula Investing Portfolio that I have been covering this year is up 26.18%*: Continue Reading…