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Thoughts on Joel Greenblatt's Magic Formula?
Posted on 12/19/15 at 11:11 pm
Posted on 12/19/15 at 11:11 pm
Sounds too good to be true but he provides ample evidence including down years. And blog posts from reputable sites aren't particularly critical even when they aren't fawning over his ideas.
Any of you guys ever try it with your own portfolios?
Any of you guys ever try it with your own portfolios?
2
Posted on 12/19/15 at 11:46 pm to Keys Open Doors
Is this the formula? *from his website*
"A: First, there is nothing "magical" about the formula. Similar formulas also work quite well. Over the last 30 years we have seen many studies that demonstrate that "value" strategies-such as buying stocks with low price/earnings (P/E) ratios can outperform the market averages. In the case of the Magic Formula system, we are screening for stocks with low P/E ratios ("cheap stocks") that also achieve high returns on capital ("good companies"). We then make some slight accounting adjustments to these commonly used ratios in order to be more accurate for comparison purposes across various companies."
"A: First, there is nothing "magical" about the formula. Similar formulas also work quite well. Over the last 30 years we have seen many studies that demonstrate that "value" strategies-such as buying stocks with low price/earnings (P/E) ratios can outperform the market averages. In the case of the Magic Formula system, we are screening for stocks with low P/E ratios ("cheap stocks") that also achieve high returns on capital ("good companies"). We then make some slight accounting adjustments to these commonly used ratios in order to be more accurate for comparison purposes across various companies."
Posted on 12/19/15 at 11:59 pm to Stingray
That's close. Basically in his book he says that he hired a developer to rank 3000+ stocks on their return on invest capital and their equity yield (EPS divided by share price) and weighted both of these equally. He bought the top 30 stocks each year and generally sold them off in December and did the same thing again in January.
Did 2.5 times better than the market between 1988 and 2005. Bloggers have done back tests for 2008 onwards and while it took a beating in 2008 (basically The same as the market), it has continued to do well since.
The idea makes sense even if it is very simple. I think the biggest holdup is the cost of buying the stocks each year.
Did 2.5 times better than the market between 1988 and 2005. Bloggers have done back tests for 2008 onwards and while it took a beating in 2008 (basically The same as the market), it has continued to do well since.
The idea makes sense even if it is very simple. I think the biggest holdup is the cost of buying the stocks each year.
Posted on 12/20/15 at 8:06 am to Keys Open Doors
I have added the "the little book that still beats the market" to my list. What is the average cost of 20 or 30 round lots?
Posted on 12/20/15 at 10:23 am to Stingray
That's the biggest problem I see. If each trade is 10 bucks, it will cost $400 to execute the strategy with 20 stocks.
Posted on 12/20/15 at 12:34 pm to Keys Open Doors
That's basically the strategy a 15 month UIT would provide.
Posted on 12/20/15 at 4:09 pm to Shepherd88
Is there an ETF or mutual fund that mirrors this strategy?
Posted on 12/20/15 at 8:25 pm to white perch
I doubt you could find an ETF to do this bc the strategy is gonna have high turnover which is against the premise of an ETF. You could probably find some growth mutual fund with high turnover but even with that you would be more diverse than what a UIT would be
Posted on 12/21/15 at 12:23 pm to white perch
Sort of. They have value weighted funds which typically outperform their equal weighted peers.
Posted on 12/21/15 at 12:56 pm to Keys Open Doors
Vanguard had a few small cap value index funds that I think accomplish this.
VTWV Russell 2000
VISVX Small Cap value fund
VTWV Russell 2000
VISVX Small Cap value fund
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