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.