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Old 06-17-2016, 11:10 AM   #61
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Greenblatt didn't specify size as a cutoff criterion. He does claim that the average outperformance is higher if one focuses on smaller companies, and then goes one by saying that it makes sense since those are covered less well.

Regarding your second point: institutions ignore small companies just as before because they are too small. I don't see that changing.

A 300B fund has no use for a 50M market cap company. Too little liquidity and too expensive to research. Same thing with HFT, they focus on deep and liquid markets.

Factor funds (like DFA) and robotraders do use small caps and mid caps though. That might have changed the landscape some.

In general from my own limited experience foreign small companies still hardly get covered. While big US companies have plenty of peering eyes.
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Old 06-18-2016, 09:22 AM   #62
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It looks like the example I was looking at, VBR, is 6.8B in net assets, so they can dive for the smaller market caps, I suppose. Also, I wonder how much research they need to do if they're just trying to match an index (CRSP US Small Cap Value Index). Of course just matching an index, they are not really "playing against me", since they're not supposed to be making bets for or against anything. Goldblatt also says about indexes "And a market-cap weighted index, if a stock is overpriced, it buys too much of it automatically. And if it’s underpriced, it buys too little of it automatically, because it’s basing it on market-cap, which is essentially price." Based on that, I'm not too concerned about institutional ownership by indexes. And I'm also not at all concerned about institutional ownership by managed funds because they're not going to have the guts to wait a long time for the hopefully eventual payout. They'll be the ones bidding up the price when the weather looks good, at which point I might be selling after the one-year holding period.

In this article, the author comments on how some big players (Apple, Microsoft, Cisco, Lorillard) are fixtures in the list, but some of those have also beaten the S&P by a healthy margin over the past five years. The author says some of those large caps that are in the magic formula screen are also in his dividend portfolio, which kind of makes sense if they are undervalued.

If I execute on this, I need to come to terms with including large cap stocks or finding a defined way of keeping them out. I'm loath to keep them out because then I'd be doing my own thing, not following the magic formula. I suppose I could justify leaving them in if, I also have a rule: "once purchased, once sold", which I'm not sure is how it's supposed to work. In other words, say you own 36 stocks and your random screen comes up with 6. What if one of those 6 was owned before and later sold? Do you re-buy it? What if another one of those 6 are currently in your portfolio? Do you keep it for another year, rather than take the next random pick? These are things I didn't consider while reading the book, so I've got it on hold at the library again.
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Old 06-22-2016, 03:19 PM   #63
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The book doesn't seem to answer the question of whether to keep a stock longer than a year if it comes up on the screen again. Everything I've read just says "rebalance". I did learn, though, that increasing the holding period is beneficial ((from this academic paper)), so I'm going to let positions go longer if they show up again. Also, this site that seems to be trying to replicate the methodology allows longer holding periods if still on the screen (magicdiligence).
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It's perfectly acceptable to hold MFI stocks 2, 3, even 5 years or more, but only if they remain on the screen!
The book does address the large vs small cap question. Small cap has the edge, but not by a huge margin 12.1% vs 11.9% (bottom and top deciles).

So no "twists" approach leaves me feeling good about it. If I can manage to keep this 'mechanical' and stay with it, I might do OK. I just hope I don't turn it into a J*b!

EDIT:
I can't believe I missed this. Or maybe I saw it and still had the question. It looks like Joel doesn't want to tell you to hold-em or cast them off:
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Q: How long should I own these stocks?

A: The Magic Formula system was designed to hold stocks for approximately one year in order to maximize your after-tax return. After the one year period you should screen for new stocks and establish a new portfolio based on the most current financial statements and stock prices. Sometimes a previously owned stock will remain on the list and then you must decide if you want to continue to hold this stock.
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Old 10-10-2016, 08:43 AM   #64
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I use Greenblatt's book to choose my pick since fall 2015. Until now I've been a bad follower picking up only the stock I thought was good, not the same amount on any pick and trying to time the market, with as always, good and bad result.

Regarding Totoro test, I think picking up every stock at the same time of the year is what make the result looks bad, as well as many test made on the Magic formula. The market condition change a lot along the year and Joel says to get a few pick "each month" which means it spread the risk along the year and the up and down of the market. I think the best way to apply the method blindly is to take 2 pick each and every month then keep it for a year.
After a year on it means you'll have 24 stock which match his 20-30 stock.
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Old 07-13-2017, 02:27 PM   #65
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Hey guys, it's nice to see so many other people trying the same method. Not so nice to see everyone not performing well, like me.

I started using the formula in 2014 based on the first book.

Since then:
  • I have used the stock screener to pick stocks
  • I pick 2 stocks per month and sell old ones if no longer in screener
  • I spent roughly the same amount on each stock (450$ with low commissions)
  • My portfolio currently holds 24 stocks that rotate during the year
  • Each stock is held for around a year, but longer if it is still in the screener after one year

Since 2014, S&P 500 appreciated around 33%
Since 2014, my portfolio appreciated around 0%

Since January 2015 I write down every day which stocks are in the screener, their mkt value and I write down all my transactions in an Excel sheet.

Conclusion, I am in the 3rd year, but still waiting for the 3-5 year long-haul magic.
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Old 07-13-2017, 02:32 PM   #66
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.........Conclusion, I am in the 3rd year, but still waiting for the 3-5 year long-haul magic.
Nice first post.
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Old 07-13-2017, 02:45 PM   #67
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Love seeing these update threads. I dont even know how to post a picture, much less Greenblatts strategy. But I am curious if The OP is winning on his method.
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Old 07-13-2017, 11:45 PM   #68
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Nice first post.
Why the facepalm? Was it due to the wonderful 0% growth or do you see a clear sign that I am doing something wrong in following the guidance steps of the book?
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Old 07-14-2017, 11:32 AM   #69
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Why the facepalm? Was it due to the wonderful 0% growth or do you see a clear sign that I am doing something wrong in following the guidance steps of the book?
Some people come here, introduce themselves and become part of the forum community. Other barge in hoping to find some marks for annuities or get rich quick investment schemes. The latter group generally don't last long.
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Old 07-14-2017, 01:25 PM   #70
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Why the facepalm? Was it due to the wonderful 0% growth or do you see a clear sign that I am doing something wrong in following the guidance steps of the book?
Welcome!
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Old 07-14-2017, 03:21 PM   #71
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Hey guys, it's nice to see so many other people trying the same method. Not so nice to see everyone not performing well, like me.
I'm publishing random picks in another thread on this board and reporting the results, along with some benchmarks.

The initial post was just over a year ago, and I just reported how the first year went for the first batch: Appreciated 30% vs S&P at about 20%.

I really don't expect that to be sustained, but it's nice that the first batch came in above the S&P 500.
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Originally Posted by keyboarder View Post
  • I have used the stock screener to pick stocks
  • I pick 2 stocks per month and sell old ones if no longer in screener
  • I spent roughly the same amount on each stock (450$ with low commissions)
  • My portfolio currently holds 24 stocks that rotate during the year
  • Each stock is held for around a year, but longer if it is still in the screener after one year
That seems like you are executing approximately the procedure outlined in the book. But I've never been clear on what happens in all cases if the random selection contains a stock already in the portfolio. Say you have a set of stocks that you've held a year, and so need "replacing". The process I follow in the other thread is to pull the screen, remove any stock currently held, including the ones to be replaced, then randomly select from the remaining stocks. This guarantees that everything gets sold after one year, nothing gets held longer. This would not guarantee that during the next cycle, previously held stocks would not get re-bought, but there would be a gap in owning that stock.

I haven't looked at the contents of the screened list as much as you have...I literally spend just an hour or so on it, every couple of months. But what I've noticed is that there seem to be "permanent members" in the screened set of stocks. So year after year, they never get bid up to a high enough price to get out of the screen. It would seem like those might be better to avoid. But of course you can't start doing that or you'd not be following the procedure in the book.

It sounds like you didn't build-up to 24 stocks over 12 months, rather you started with 24? In that other thread, you can see that every two months, I've got 5 random picks, so target a few more stocks than you: 30.

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Originally Posted by keyboarder View Post
Since 2014, S&P 500 appreciated around 33%
Since 2014, my portfolio appreciated around 0%
I wonder if you have been "unlucky", or if the method isn't going to pan-out for you, or both. Do you REALLY pick randomly (i.e. use the random function in the spreadsheet)?
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Old 07-14-2017, 11:48 PM   #72
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I'm publishing random picks in another thread on this board and reporting the results, along with some benchmarks.

The initial post was just over a year ago, and I just reported how the first year went for the first batch: Appreciated 30% vs S&P at about 20%.

I really don't expect that to be sustained, but it's nice that the first batch came in above the S&P 500.
That seems like you are executing approximately the procedure outlined in the book. But I've never been clear on what happens in all cases if the random selection contains a stock already in the portfolio. Say you have a set of stocks that you've held a year, and so need "replacing". The process I follow in the other thread is to pull the screen, remove any stock currently held, including the ones to be replaced, then randomly select from the remaining stocks. This guarantees that everything gets sold after one year, nothing gets held longer. This would not guarantee that during the next cycle, previously held stocks would not get re-bought, but there would be a gap in owning that stock.

I haven't looked at the contents of the screened list as much as you have...I literally spend just an hour or so on it, every couple of months. But what I've noticed is that there seem to be "permanent members" in the screened set of stocks. So year after year, they never get bid up to a high enough price to get out of the screen. It would seem like those might be better to avoid. But of course you can't start doing that or you'd not be following the procedure in the book.

It sounds like you didn't build-up to 24 stocks over 12 months, rather you started with 24? In that other thread, you can see that every two months, I've got 5 random picks, so target a few more stocks than you: 30.

I wonder if you have been "unlucky", or if the method isn't going to pan-out for you, or both. Do you REALLY pick randomly (i.e. use the random function in the spreadsheet)?
Thank you for your insight, Sengsational. I built up to 24 stocks throughout the first year, but by now I guess it wouldn't matter so much.

It seems to me that some permanent in the screener are dying businesses, but some are just slow growing companies, like Argan (AGX). They build huge energy related facilities internationally, for example. That single stock appreciated 100% for me, but many others have failed.

I certainly glad to hear that you had success with your take on the strategy!
That lifts my spirits and gives me strength to keep going.

And yes, every day I take a look at the screener using the "Get Stocks" button. It just pops out a new fresh list. Some new stocks show up, most of the time.

I am actually starting to look deeper into the stocks in the screener to rule out possible big losers and I read "5 rules for successful stock investing" by Pat Dorsey to help me doing that. It's not that it will save me from disaster, but maybe I can avoid some obvious ones.
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