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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).
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!

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:
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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