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 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:

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.

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

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:

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

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:

The following graphic shows how each of the four purchases have performed. Remember, this is a hypothetical portfolio.

Even with the bounce back up to over 6% from a negative, we are still a long ways from the 26%+ return this portfolio registered earlier this year.

For more information, check out the following 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

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:

So, I think we can gather from the graphic that this strategy is not for the faint of heart. I would recommend that you put only a fraction of your money in this strategy or change up the formula by allowing it choose companies with higher market caps (for this portfolio my market cap threshold is $500 million, which is rather low).

Also, it’s important to point out that not all of the money was invested at the same time. Following the procedure laid out on MagicFormulaInvesting.com, I did four separate purchases of $2,500 each ($500 per stock):

January 5, 2007 Purchases:

FreightCar America Inc (RAIL)
Aspreva Pharmaceuticals Corp (ASPV)
Freeport-McMoran Copper & Gold Inc. (FCX)
OmniVision Technologies Inc. (OVTI)
Fording Canadian Coal Trust (FDG)
Performance of the group since purchase: 25.00%

March 27, 2007 Purchases:

Teck Cominco Ltd. (TCK)
JAKKS Pacific Inc. (JAKK)
King Pharmaceuticals Inc. (KG)
K-Swiss Inc. (KSWS)
Labor Ready Inc. (LRW)
Performance of the group since purchase: -1.23%

May 1, 2007 Purchases:

Kelly Services Inc. (KELYA)
Steven Madden Ltd. (SHOO)
Southern Copper Corp. (PCU)
USA Mobility Inc. (USMO)
Western Refining Inc. (WNR)
Performance of the group since purchase: 4.60%

July 9, 2007 Purchases:

ViroPharma Incorporated (VPHM)
Biovail Corporation (BVF)
American Eagle Outfitters (AEO)
Frontier Oil Corporation (FTO)
Lam Research Corporation (LRCX)
Performance of the group since purchase: -12.35%

To read up on the strategy and follow along, 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

According to the formula, I will make the fourth and final purchase today. So far this year, I have made three purchases of $2,500 each. This final purchase will be the last purchase until January 2008 at which time I will run the screen again and sell those stocks purchased in January of this year. The staggered purchases will make bookkeeping a little more tedious but it won’t be that bad.

Anyway, I’ll let you know which stocks were chosen in the last batch tomorrow. Stay tuned…

Other Magic Formula posts:

Magic Formula Portfolio May Update

Magic Fomula Portfolio April Update

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

*This is a hypothetical portfolio that started out with $10,000. The annual fee of $199 is the same regardless of portfolio size. However, since we are dealing with a relatively small account balance, the $199 fee is rather large fee on a percentage basis. That said, the YTD return on the portfolio net of fees is 23.52%.

Now, here’s how the portfolio has performed so far this year:

Click here for an expanded table. Not too shabby! Up 17% since January. A total investment of $7,500 (3 purchases of $2,500 each) is now worth $8,776. Even after deducting $199 for FOLIOfn fees for the year, the portfolio is still up 14.36%. Keep in mind that the $199 fee is fixed so the larger the portfolio the smaller the fee will be as a percentage of the portfolio. In other words, the $199 fee seems excessive but that’s because we are dealing with a small portfolio.

I’ll make the fourth and final purchase in early July.

To read more about this portfolio, see these posts:

Magic Fomula Portfolio April Update

A Look at Magic Formula Investing

Magic Formula – Portfolio Update

Magic Formula Investing Update – 2nd “Purchase”

DISCLAIMER: This is a hypothetical portfolio and is in no way a recommendation. Invest at your own risk.