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"Little Book that Beats the Market"
Old 02-23-2010, 01:40 PM   #1
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"Little Book that Beats the Market"

I've just read this book and wondered if anyone here has used the "Magic Formula" for stock selection. If so, how did the method perform during the recent stock market drop, and how well is it recovering? I also wonder how a group of stocks selected according to the formula compares in volatility to, say, an S & P index fund.
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Old 02-23-2010, 05:07 PM   #2
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Originally Posted by kyounge1956 View Post
I've just read this book and wondered if anyone here has used the "Magic Formula" for stock selection. If so, how did the method perform during the recent stock market drop, and how well is it recovering? I also wonder how a group of stocks selected according to the formula compares in volatility to, say, an S & P index fund.
I would like to see the risk normalized returns of the "magic Formula" versus the market. And some stats over the timeframe used for comparison.

Do you have a link to the magic formula - or is that a well kept secret ?
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Old 02-23-2010, 05:26 PM   #3
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I would like to see the risk normalized returns of the "magic Formula" versus the market. And some stats over the timeframe used for comparison.

Do you have a link to the magic formula - or is that a well kept secret ?
Here's the website. Does "risk adjusted return" mean percentage of return for each percentage of standard deviation (or per unit of other risk measure)?
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Old 02-23-2010, 05:50 PM   #4
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Here's the website. Does "risk adjusted return" mean percentage of return for each percentage of standard deviation (or per unit of other risk measure)?
yes I suppose you could phrase it that way.

So for example I could cherry pick some volatile stocks that did well over some period and advertise my performance as beating the market. However you hold them when things go sour and you lose your shirt much more than the market.

That's the risk-reward tradeoff.

The bigger point is that every investor, every mutual fund tries to do something similar. Or at least wants to do something similar.

So what's so special about this "magic Formula" - what is it exactly ?
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Old 02-23-2010, 06:03 PM   #5
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yes I suppose you could phrase it that way.

So for example I could cherry pick some volatile stocks that did well over some period and advertise my performance as beating the market. However you hold them when things go sour and you lose your shirt much more than the market.

That's the risk-reward tradeoff.

The bigger point is that every investor, every mutual fund tries to do something similar. Or at least wants to do something similar.

So what's so special about this "magic Formula" - what is it exactly ?
Basically, a selection of large-cap stocks with a combination of high return on capital + high earnings yield, or in layman's terms, "a good business at a bargain price". That makes it a variant on value investing, yes?
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Old 02-23-2010, 06:06 PM   #6
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How is that different than what we call value investing ?
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Old 02-23-2010, 06:34 PM   #7
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How is that different than what we call value investing ?
As I understand it, value investing only checks whether the stock is selling at a bargain price. If that's a correct description of value investing, the difference between it and the formula is that the formula also includes screening for returns. In short: value investing=buy stocks cheap; Magic Formula=buy stock in profitable companies, cheap.

Do I remember correctly that value stocks are somewhat more volatile than stocks as a whole, or am I thinking of small-cap stocks?
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Old 02-23-2010, 06:55 PM   #8
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Price all by itself is meaningless as an indicator.

I always thought that value investing was all about buying stock in profitable companies, cheap.

maybe someone else can chime in here.
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Old 02-23-2010, 08:38 PM   #9
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I think by value investing most people mean investing in stocks that have PE ratios lower than the market average.
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Old 02-23-2010, 09:41 PM   #10
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I think value investing means different things to different people. At one extreme, "value" is the half of the market selling on the lowes PE ratios (in contrast to the "growth" being the other half of the market selling on the highest PEs). For other people "value" either means value by reference to all or some of the fundamentals of the underlying companies or (less commonly) by reference to comparisons with other companies. (I'm not expressing any views on these approaches to "value" investing.)

In relation to the proposal in the book, if it were that easy for anyone to "beat the market" it would be a disgrace for any investor to produce below average returns. Since by definition that cannot happen, I have difficulty accepting that any simplistic formula can reliably beat the market.
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Old 02-24-2010, 06:28 AM   #11
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...............I have difficulty accepting that any simplistic formula can reliably beat the market.
If I had that magic formula I'd keep it to myself, invest until I was stinking rich, then burn it. I sure as heck wouldn't spend my days shilling a book.
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Old 02-24-2010, 07:28 AM   #12
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If I had that magic formula I'd keep it to myself, invest until I was stinking rich, then burn it. I sure as heck wouldn't spend my days shilling a book.
The way to get rich is to write a book on how to get rich.

Now that's the Magic Forumla in a nutshell.
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Old 02-24-2010, 07:36 AM   #13
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If I had that magic formula I'd keep it to myself, invest until I was stinking rich, then burn it. I sure as heck wouldn't spend my days shilling a book.
Uhn uuuuhhhhh If you bring candy to school, you gotta share.
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Old 02-24-2010, 11:22 AM   #14
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Uhn uuuuhhhhh If you bring candy to school, you gotta share.
OK, Freebird - just between you and me:

Buy low and sell high
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Old 02-24-2010, 12:18 PM   #15
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The way to get rich is to write a book on how to get rich.
Ain't that the truth.
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Old 02-25-2010, 06:30 AM   #16
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OK, Freebird - just between you and me:

Buy low and sell high
I wish someone would have told me this a long time ago.
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Old 02-25-2010, 08:00 AM   #17
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I wish someone would have told me this a long time ago.
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OK, Freebird - just between you and me:

Buy low and sell high
I'm still immersed in the 24 waiting period to see if this advice makes sense before I make any rash decisions or...drum roll...drastic moves.

I'll update you at 1:22 PM Eastern time today. How's that?
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Old 02-25-2010, 09:15 AM   #18
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I'm still immersed in the 24 waiting period to see if this advice makes sense before I make any rash decisions or...drum roll...drastic moves.
I'll update you at 1:22 PM Eastern time today. How's that?
With apologies to Will Rogers, remember to only buy the stocks that go up. If they don't go up then don't buy them...
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Old 02-25-2010, 09:33 AM   #19
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And remember: if a stock breaks below X, then it is bearish. In other words, if the stock goes down, it has gone down.
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Old 05-31-2010, 08:24 AM   #20
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If I had that magic formula I'd keep it to myself, invest until I was stinking rich, then burn it. I sure as heck wouldn't spend my days shilling a book.
The guy who wrote it basically followed your formula through the stinking rich part.

Google 'Joel Greenblatt.'
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