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Old 11-18-2014, 03:35 PM   #21
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Now I would assume that since everyone else has access to these same screens, including pretty much every mutual fund manager in the world, and since they have probably have a lot more time to spend analyzing screens than you do, they pretty much have tried all of this in the past and are still trying now. And we all know how well it has worked out for the active managers of mutual funds.
According to the book, which I read, the companies in the screen are small enough that any mutual fund on the planet, even small ones, would bid the price up since there are not that many shares for sale. Thus, these companies are not analyzed by mutual fund managers. So your "competition" is primarily insiders and others using the magic formula.

If you look around on the internet for stock picking histories and portfolio simulations, you can see some folks that have been at it for a long time, with returns like those predicted in the books.

The book's 2001 title was originally "...that beats the market" and in 2006 it was released as "...that still beats the market", but the latter put more emphasis on the point that beating the market doesn't mean making money!
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Old 11-18-2014, 04:46 PM   #22
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Originally Posted by Huston55 View Post
The Dead
I think most are not quite dead but have morphed into something bigger (how poetic).

Checked four names, could find three of them:

Quote:
FTO: Frontier Oil
Merged with hollyfrontier corp after some very profitable years.

Quote:
KSWS: K Swiss (Footwear)
Got acquired. Suspect shareholders bled in years before though.

Quote:
MVL: Marvel Entertainment (Patents)
Marvel got acquired by Disney. Not patents but movies and comic books I don't think shareholders "lost" per se on the acquisition deal.

Now what happened to the living in the past 10 years? Did some rough checks. Numbers are not really accurate, just to give a feel.

KND : yo-yo stock. Currently -30% or so.
HRB : +20% or so after long decline
CECO: -80%.
CSGS: yo-yo stock. Current on a roll + 100%
FCX : went nowhere. +20% or so
JAKK : crashed -75%
KFY : went down, recently recovered +30%
MDLN: couldn't find
NSS : no history
OVTI : yo-yo. Currently up 100%
PGI : sort of status quo
UNTD: down 10%
UST : seems to be T-Bills, not a company

At first glance it seems you are better off being dead

[Edit] At second glance these yo-yo effects offer huge arbitrage opportunities. As long as MF gives it the nod when it's on yo-down instead of yo-up
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Old 11-18-2014, 05:52 PM   #23
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....
KND : yo-yo stock. Currently -30% or so.
HRB : +20% or so after long decline
CECO: -80%.
CSGS: yo-yo stock. Current on a roll + 100%
FCX : went nowhere. +20% or so
JAKK : crashed -75%
KFY : went down, recently recovered +30%
MDLN: couldn't find
NSS : no history
OVTI : yo-yo. Currently up 100%
PGI : sort of status quo
UNTD: down 10%
UST : seems to be T-Bills, not a company
....
I think I am missing something significant here. I checked a couple of these symbols that looked familiar; and, they seem to be much too large for your criteria, even a decade ago.

For example, FCX = Freeport-McMoRan to me which I believe has had a multimillion dollar market cap for well over a decade.

Please educate me.
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Old 11-19-2014, 05:16 AM   #24
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These weren't mine, but companies Huston55 bought ten years ago. Just curious as to what happened with them over time.

The MF screener itself gives you small and large cap companies, so apparently Huston55 also included large caps.

I'm only going for the smaller ones (around and below 300M, down to 50M) though. Basically use the standard screener (50 companies) and select the bottom 20 in market cap.
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Old 11-19-2014, 05:41 AM   #25
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These weren't mine, but companies Huston55 bought ten years ago. Just curious as to what happened with them over time.

The MF screener itself gives you small and large cap companies, so apparently Huston55 also included large caps.

I'm only going for the smaller ones (around and below 300M, down to 50M) though. Basically use the standard screener (50 companies) and select the bottom 20 in market cap.
It's been so long ago since I set up the screen that I don't remember the criteria but, it must have included a large cap choice. Just for clarity, I established the screen and shadowed these positions; I didn't buy them...thankfully.
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Old 11-19-2014, 08:45 AM   #26
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Thanks Totoro and Huston55 for the clarifications.

My confusion was likely the result of one or more of these: Too little caffeine, ineffective multitasking, ineffective skimming or just plain getting older.
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Old 11-19-2014, 10:13 AM   #27
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Intend to pick this thread up every so often in the coming years for myself and others to enjoy, so best to start afresh. I posted bits and pieces already around the forum earlier.
Thanks for posting about this. I love reading about these real time mini-experiments.

Quote:
  • There is a huge spread in returns between individual companies within the list. I'll post a histogram later on.
  • Given that, 10 stocks is not nearly enough to diversify. The book mentions this, now I understand better why.
I have read this about small cap investing that the returns are made with a small number of homeruns but never looked at the data myself. Although your data set is small, you could run a simulation with your histogram (pretending it was the true distribution) and determine just how many stocks you need to diversify and get within +/- X percent of the population average.

Quote:
First results after 9 months (Nov. 17 2014). Note that this is without dividends, but the general picture is the same (did some spot checks).
  • S&P 500 gained about 13%
  • The entire 50 company list gained about 13% too
  • The smallest 20 companies gained about 17%
  • My selection gained about 4% (oops)
I don't think S&P 500 is the right benchmark but in anycase I believe microcaps as a whole have not done well this year. So maybe your 4% is better than expected (although unclear if it is due to noise).


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The average market cap of VTI is $40 billion or more than 100x large than what size companies he is buying. VB Vanguard Small Cap the average market cap is just under $3 billion or 10x as big as he is buying. The average position size of VB is over $5 million. The liquidity of companies stock is so small that isn't not worth the time and effort for almost any institutional money managers to deal with them.
Yeah Vanguard is not the place to go for microcap stocks. However there are other fund companies that run micro cap etf's/indexes etc. I have one whose holdings average 200M in size.

The drawback of these funds are usually higher expense ratios. However I would hope that they take advantage of the lack of liquidity (i.e. dfa' patient trading strategy) to improve returns which cannot be done by an individual investor. I'm not sure of the effect size here but perhaps this will offset a big chunk of the expense ratio.
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Old 11-19-2014, 10:18 AM   #28
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Mine was a simpler experiment. About 25 yrs ago, I participated in a dividend reinvestment plan to buy company stocks, slowly and reinvest all dividends.
These were S&P 500 stocks, large cap. It was like throwing dart in the wall, with little fundamental analysis, but I tried to be diversified. Of the 18 stocks, only 1 lost money, One change it's name, & had spin offs, some grew slower than S&P index, three grew more than 10X the original invested. I invested 10K per stock, and at the end of the experiment when I retired, the portfolio was worth more than 650K. I sold part of the biggest gainers, while we are still in the bull market.
I don't know how I did compared to my other investments.
My only regret is that, if I only doubled the original amount, and let it run,
then, the current value is about 1.3 Million.
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Old 11-19-2014, 10:43 AM   #29
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...
The drawback of these funds are usually higher expense ratios. However I would hope that they take advantage of the lack of liquidity (i.e. dfa' patient trading strategy) to improve returns which cannot be done by an individual investor. I'm not sure of the effect size here but perhaps this will offset a big chunk of the expense ratio.
Another drawback for funds that Goldblatt mentions is that fund managers have to answer to their investors on (at least) a quarterly basis. That puts pressure on them to "do something" (window dressing) that the true magic formula investor doesn't have; if you have bought into the idea, you'll be sticking with the methodology for three years, not making mid-course corrections.
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Old 11-19-2014, 07:59 PM   #30
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Mine was a simpler experiment. About 25 yrs ago, I participated in a dividend reinvestment plan to buy company stocks, slowly and reinvest all dividends.
These were S&P 500 stocks, large cap. It was like throwing dart in the wall, with little fundamental analysis, but I tried to be diversified. Of the 18 stocks, only 1 lost money, One change it's name, & had spin offs, some grew slower than S&P index, three grew more than 10X the original invested. I invested 10K per stock, and at the end of the experiment when I retired, the portfolio was worth more than 650K. I sold part of the biggest gainers, while we are still in the bull market.
I don't know how I did compared to my other investments.
My only regret is that, if I only doubled the original amount, and let it run,
then, the current value is about 1.3 Million.
First, I'm a DRIP supporter. Have used the same approach in the past.

Second, not sure I'm interpreting your investment timeline correctly but, if you bought all 18 stocks ~25yrs ago, your investment value has increased a little less than 4-fold and your avg AR over that 25yrs is ~5.3%.

During the same 25yrs, the S&P grew from ~340 to 2040, a 6-fold increase with an avg AR of ~7.5%.
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Old 11-19-2014, 08:55 PM   #31
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Another drawback for funds that Goldblatt mentions is that fund managers have to answer to their investors on (at least) a quarterly basis. That puts pressure on them to "do something" (window dressing) that the true magic formula investor doesn't have;
I try to get funds that are either indexes or have a mostly passive trading strategy (i.e. they don't try to pick winners/losers within the asset category) to avoid above mentioned problem. However, due to their small size of AUM, I have seen some funds distribute large capital gains (which might not be wanted) when a larger institutional investor decides to dump it.
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Old 12-24-2014, 04:52 AM   #32
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Just to go on record.

On December 15th I bought the following 20 stocks in equal share. Largest market cap at buy time was around 300m, smallest 30 or so.

Now all I have to do is sit on my hands and watch the experiment unfold. Benchmark will be the S&P 500.

  • AFOP
  • MSB
  • PETS
  • VEC
  • SPOK
  • CCUR
  • ONE
  • TZOO
  • AWRE
  • ADMS
  • PTIE
  • GORO
  • WILN
  • PFMT
  • LBMH
  • MNDO
  • PDLI
  • RPXC
  • RGR
  • LQDT
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Old 07-17-2015, 08:38 AM   #33
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Thought today I'd do a quick interim review, full analysis 15 dec. of this year.

Above stocks are roughly up about 7% vs. SPY 6%. Both in USD terms, and excluding dividends. Dividends are slightly higher on the stocks vs. SPY I think, but haven't checked in detail.

Supposed January effect didn't really materialize as far as I can tell.

The volatility pattern continues. Notable home run is ADMS (doubled), implosion-of-the-year-to-date award goes to PFMT ("Performant Financial Corp.", what's in a name ..). It halved.

Looking forward to judgement day coming December.
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Old 07-17-2015, 01:57 PM   #34
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Just to go on record.

On December 15th I bought the following 20 stocks in equal share. Largest market cap at buy time was around 300m, smallest 30 or so.

Now all I have to do is sit on my hands and watch the experiment unfold. Benchmark will be the S&P 500.
Because of the market-cap range, why use S&P500 and not a small-cap index, fund, or ETF?

Year-to-7/16 performance
VOO (S&P500): 4.3%
VB (small-cap): 5.6%

What dates did you use for your SPY 6%? Morningstar has 4.25% Y-T-6/16.
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Old 07-17-2015, 03:29 PM   #35
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Good point.

Numbers I used came from finance.yahoo.com. SPY today closed at 212.47, on 15 Dec 2014 it closed at 199.51 (when I bought the shares). That's 6.5%. So not year-to-date performance exactly. Morningstar has the same figures.

I used SPY as a quick proxy for my investment alternative if this fails, worldwide indexing (Vanguard VT - up 7.2%, had to check now ).

Indeed better (to see where differences come from) to look at equivalent index class too. VB ended today at 123.08 NAV, was 112.57 on Dec. 15 2014 (+9.3%).

So a bit better than SPY, quite a bit worse than VB, about the same as VT.

Again without dividends (VB has a lower yield), disregarding transaction or management fees and a short time frame. Roughly same I'd guess, but certainly no outperformance magic as of yet.
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Old 03-10-2016, 12:36 PM   #36
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Update after second year of magic formula. It is what I would call a not good result.

Sold out positions on 20th of january 2016, so kept the stocks a bit longer than a year, due to travel.

Summary result:
S&P 500 during that time: roughly -7%
Stocks listed below in aggregate: -28%

Both excluding dividends, but the difference is pretty striking.

Longer update to follow.
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Old 03-10-2016, 12:46 PM   #37
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As you can see below, no big winners and plenty of big losers. Overall pretty bad. % difference is buy vs. sell value in USD.
  • AFOP ( -2%)
  • MSB (-81%)
  • PETS (+31%)
  • VEC (-40%)
  • SPOK ( -1%)
  • CCUR (-23%)
  • ONE (-20%)
  • TZOO (-44%)
  • AWRE (-37%)
  • ADMS (+57%)
  • PTIE (-9%)
  • GORO (-61%)
  • WILN (-67%)
  • PFMT (-72%)
  • LBMH (+19%)
  • MNDO (-32%)
  • PDLI (-64%)
  • RPXC (-38%)
  • RGR (-5%)
  • LQDT (-58%)
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Old 03-10-2016, 12:53 PM   #38
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I guess you need to wait for that jackpot stock to bail out.
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Old 03-10-2016, 12:54 PM   #39
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.. so what's next for the magic formula experiment?

I will continue to monitor the new selection I made using the same approach as last year, and see what happens with them. However I will no longer put my money in it given the failure to a) deliver on the promise so far and b) the individual stocks I selected myself have outperformed the market with a lower beta during the past five years.

Just to elaborate on the failure to deliver: the little book claims that if one selects from the small cap universe that in every single year it outperforms the S&P 500 and in addition there is no year it has negative returns. Given it has broken these two boundaries I am becoming more cautious. Aware obviously mr. Greenblatt claims you need to follow the approach for 3 to 5 years, which is why I'll still track the new selection.

So expect a new post in this thread somewhere in 2017

WLDN
ESI
NRT
BSQR
CLCT
UNTD
VEC
NHTC
MCFT
BBSI
LIFZF
AGX
BPT
PDLI
CPLA
OUTR
IQNT
ENTA
RPXC
SCMP

[Edit] : selection was done on January 19th. 50 stocks selected from the screener, took the smallest (in market cap) 20 from that list. As you may have seen a few that were on the list last year are still there (e.g. VEC, PDLI, RPXC)
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Old 03-10-2016, 04:27 PM   #40
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As others have posted, The S&P500 is the wrong index to compare to. You need a mid-cap or small cap index. Apples and oranges here. Midcap/Smallcap stocks tend to do very well early in the business cycle.

And more importantly, you need to track the results over 15 years or so to make any statistically relevant conclusions about your method. Short term trends (one way or the other) could just be luck (good or bad) rather than method.
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