# Magic Formula Investing



## ibli (Feb 5, 2011)

I've been reading Joel Greenblatt's Little Book That Beat's the market and his magic formula really appeals to me on several levels. I'm in interested if anyone has experience running it with a real money portfolio over the last several years since the book came out?

I've googled around and can find people who've used it for a couple of years before abandoning it and validea.com seems to have a tracking portfolio that follows it. For such a popular book there seem to be a dearth of real people using to it invest with real money for any length of time. It's a little concerning to say the least.

Does anyone have any experience using it for a real, or tracking portfolio for at least 3 years? Can you point me to someone on the web who has?

Thanks


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## Argonaut (Dec 7, 2010)

The magic formula for him was probably writing that book. Stock screening only gives you a snapshot in that point in time, and isn't forward thinking like the market is. Putting together return on capital and price to earnings isn't going to tell you much about what a stock will do in the future, it needs a catalyst going forward.


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## Xoron (Jun 22, 2010)

ibli said:


> I've been reading Joel Greenblatt's Little Book That Beat's the market and his magic formula really appeals to me on several levels. I'm in interested if anyone has experience running it with a real money portfolio over the last several years since the book came out?
> .
> .
> .
> ...


I've been doing it for the US portion of my RRSP since mid 2008. I continue to invest in the MFI because the returns have been pretty good. Will they continue: who knows but I'm sticking with it for now.

There is a Yahoo Group dedicated to MFI investments. 
http://finance.groups.yahoo.com/group/magicformulainvesting/

There is also this blogger, who replicates the MFI list with ranking for the top 200 stocks. He does this every few weeks:
http://justadrone.blogspot.com/

And finally, there is Magic Diligence. I'm not a huge fan of this (paid) site. Some articles are free, but membership is required for full access.
http://www.magicdiligence.com/


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## ibli (Feb 5, 2011)

*Value Investing*

Thanks for the reply. 

Greenblatt was already extremely rich before he wrote the book. While I'm sure it's making him money it hasn't been his ticket to wealth, the amount of money he's made from the book pales in comparison of the amount he made from his hedge fund.

No one can predict what's going to happen in the future. I'm a believer in value investing and the best way to make money in the market is to buy good, or great companies for reasonable, or low prices. The magic formula seems like a good way of identifying value stocks to invest in.

O'Shaughnessy's system after going through a couple of years of under performance has come back and is proving itself in the long term. Value Line's model portfolio's theoretically did very well, but the funds based on them did terrible because the trading costs were killing them.

I'm interested in people who've had experiences either positive or negative with the magic formula stocks.


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## gibor365 (Apr 1, 2011)

I think that this MFI is not for Canadian market.
Out of curiousity I found 10 top MFI Canadian stocks for Mar 2, 2010:
Bird Construction Inc.	BDT-T
Atrium Innovations Inc.	ATB-T
Cash Store Financial Svcs. Inc.	CSF-T
Research In Motion Ltd.	RIM-T
Terra Nova Royalty Corp.	TTT-T
Transat A.T. Inc.	TRZ.B-T
Quebecor Inc.	QBR.B-T
Astral Media Inc.	ACM.A-T
Yellow Media Inc.	YLO-T
Metro Inc.	MRU.A-T
-----------------------------------
If I would invest into those MFI stocks, my return would be -6% (and commissions to uy those stocks).
If I would invest simply into XIU, my return would be 14.5%

So, I think , i'' skip MFI


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## Xoron (Jun 22, 2010)

gibor said:


> I think that this MFI is not for Canadian market.


I agree. I think that the Canadian market is too small to really do MFI effectively.

I follow the MFI rules to the letter, 6 stocks every quarter, selling after 1 year. I've gotten excellent returns on my US investments, so I figured I'd try it on the CAD market.

I used a screener at my brokerage to find all stocks over 100M in Canada. In sept 2010 I did paper trading, and "purchased" 6 CAD stocks, and in Dec I "purchased another 6, and again in March I've "purchased" another 6. 

So far my MFI stocks are up 11.08% vs equivalent purchases of XIC which are up only 5.96%. Now, that investment time frame is tiny, but I think it proves that the MFI formula COULD work on the CAD market. But it would take serious belief in the MFI strategy to purchase some of the companies that the screener spits out


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## webber22 (Mar 6, 2011)

Xoron said:


> I agree. I think that the Canadian market is too small to really do MFI effectively.
> 
> I follow the MFI rules to the letter, 6 stocks every quarter, selling after 1 year. I've gotten excellent returns on my US investments, so I figured I'd try it on the CAD market.
> 
> ...


Could you list those purchases please ?


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## Xoron (Jun 22, 2010)

webber22 said:


> Could you list those purchases please ?


Sure, but again, I'm not sure I'd have the resolve to purchase most of these stocks.


Date	Tranaction	Symbol	Price
17-Mar-11	Buy	CFX.TO ​$17.10 
17-Mar-11	Buy	RIT-UN.TO ​$10.60 
17-Mar-11	Buy	SIN-UN.TO ​$13.46 
17-Mar-11	Buy	ATH.TO ​$16.95 
17-Mar-11	Buy	PME.TO ​$10.94 
17-Mar-11	Buy	CDU.TO ​$1.73 
16-Dec-10	Buy	IDX-UN.TO ​$12.14 
16-Dec-10	Buy	LIF-UN.TO ​$65.76 
16-Dec-10	Buy	BNE.TO ​$51.10 
16-Dec-10	Buy	CFX.TO ​$14.06 
16-Dec-10	Buy	COM.TO ​$5.97 
15-Dec-10	Buy	GH.TO ​$9.95 
27-Sep-10	Buy	SLG.V ​$3.20 
27-Sep-10	Buy	RIM.TO ​$49.67 
27-Sep-10	Buy	FTP.TO ​$37.83 
27-Sep-10	Buy	DWI.TO ​$7.42 
27-Sep-10	Buy	CMG.TO ​$18.00 
27-Sep-10	Buy	BEV.TO ​$1.80 


And my XIC Purchases:
Date Type	Symbol	Price
17-Mar-11	Buy	XIC.TO	​21.79
16-Dec-10	Buy	XIC.TO	​20.83
27-Sep-10	Buy	XIC.TO	​19.18

(Sorry about the formatting, difficult to format nicely on this forum)


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## gibor365 (Apr 1, 2011)

Xoron said:


> I agree. I think that the Canadian market is too small to really do MFI effectively.
> 
> I follow the MFI rules to the letter, 6 stocks every quarter, selling after 1 year. I've gotten excellent returns on my US investments, so I figured I'd try it on the CAD market.
> 
> ...


Sounds interesting....however "on paper" , I usually win in rouleete, but in real life - never 
So, as per your plan, you can have maximum of 18 stocks...but if avery one year you get in your screener same companies , do you still "sell"?

What parameters did you use except 100M?


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## Xoron (Jun 22, 2010)

gibor said:


> Sounds interesting....however "on paper" , I usually win in rouleete, but in real life - never
> So, as per your plan, you can have maximum of 18 stocks...but if avery one year you get in your screener same companies , do you still "sell"?
> 
> 
> What parameters did you use except 100M?


Gibor: 

What I do is buy 6 stocks every 3 months, so I'm only 3/4 of the way through. In June I'll be "buying" another 6 for a total of 24.

The rule is, sell after 1 year. If it shows up on the list again, keep or replace, doesn't really matter. But it takes guts to keep a losing stock that hits on the MFI screen again. 

What I do is have a set $ amount per stock, so if after a year a particular stock is on the list and in the red, I add to the position. If it's in the black, then I sell some to get me back to 1/24 of the portfolio value.

If you read the book (and at ~$20 at chapters it's well worth it), there is the official way to do it and the poor mans way to do it. The official way requires a sophisticated screener and my brokerage has a less than excellent offering. So these CAD stocks are using the poor man's method.

My screen is:
- All CAD stocks
- Market Cap > 100Mil
- Price > $1.00
- ROA > 25%
- Ignore all financial companies (including banks, mutual fund companies, etc..)
- Ignore all Utilities
- Sort the list by P/E and select the 6 lowest stocks. (Be careful of stocks with P/E less than 5, might indicate a problem with the stock). Here is where I do a little more due diligence. I will take the best 10-15 stocks by P/E and then check out things like recent news, P/B, P/sales, Cash Flow, and choose the best 6 from that list. 

Hence my CAD MFI Stocks.


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## gibor365 (Apr 1, 2011)

I did similar screening, added dividend-payer and couple of more selection, here what I got 

PGF 
CTU.A
TCL.A
RET.A
EH
TFI
MSD
BYD.UN


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## MoneyMaker (Jun 1, 2009)

Heads up, Greenblatt has a new book out... and his "You Can Be a Stock Market Genius" is probably one of the best investment books i've ever read


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## Xoron (Jun 22, 2010)

MoneyMaker said:


> Heads up, Greenblatt has a new book out... and his "You Can Be a Stock Market Genius" is probably one of the best investment books i've ever read


I've read the new book. I'm not all that impressed with the new model. With the amount of trading involved, it can only be done by an institutional investor. In other words, you have to get the results by buying an ETF or Mutual fund.

At least with the "Little Book that Beats the Market" the individual investor can implement the strategies.


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## ibli (Feb 5, 2011)

Xoron said:


> I've been doing it for the US portion of my RRSP since mid 2008. I continue to invest in the MFI because the returns have been pretty good. Will they continue: who knows but I'm sticking with it for now.
> 
> There is a Yahoo Group dedicated to MFI investments.
> http://finance.groups.yahoo.com/group/magicformulainvesting/
> ...


Thanks the Yahoo group and JustADrone were exactly what I was looking for.


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## Xoron (Jun 22, 2010)

ibli said:


> Thanks the Yahoo group and JustADrone were exactly what I was looking for.


I've only been follwing JustADrone since January, but I like that blog too. Hope you can find it useful.


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## Island (Sep 6, 2012)

*The Little Book That Still Beats the Market*

Have any of you read "The Little Book That Still Beats the Market" by Joel Greenblatt?

What did you think?

Specifically I'm wondering if anyone has verified the statistical findings on the investment strategy Greenblatt recommends and if anyone has found a stock screener that makes it easy to follow his strategy for stocks on the TSE.


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## 44545 (Feb 14, 2012)

Island said:


> Have any of you read "The Little Book That Still Beats the Market" by Joel Greenblatt?
> 
> What did you think?
> 
> Specifically I'm wondering if anyone has verified the statistical findings on the investment strategy Greenblatt recommends and if anyone has found a stock screener that makes it easy to follow his strategy for stocks on the TSE.


Start with these two books:

"A Random Walk Down Wall Street" by Burton Malkiel
"The Four Pillars of Investing" by William Bernstein


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## Xoron (Jun 22, 2010)

Island said:


> Have any of you read "The Little Book That Still Beats the Market" by Joel Greenblatt?


We did talk about this in another thread. http://canadianmoneyforum.com/showthread.php/6928-Magic-Formula-Investing

I use it for my USD portion of my investments. Canadian market is just too small for it.


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## Island (Sep 6, 2012)

Thanks Xoron! 

From your post on the other thread, it seems you use the buy strategy from the book but you don't use the sell strategy. That makes sense since in Canada we don't have a difference between short term and long term capital gains. How's it working out?

I'm looking at getting the last 100 years of stock market data so I can analyze strategies like the one in the book and your variation of it against that data for both US and Canadian markets. My suspicion is that because the Canadian market is smaller, it should make the strategy work better, not worse.

I'm currently 6 months into using the strategy in the book for the US portion of my holdings buying 2 stocks every month.


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## Xoron (Jun 22, 2010)

Island said:


> From your post on the other thread, it seems you use the buy strategy from the book but you don't use the sell strategy.


My Sell Strategy is:
- Not on the MFI list, sell
- Still on the MFI list, keep or sell depending on the fundamentals / outlook (and buy / sell a few shares to get me back to my target %)




Island said:


> How's it working out?


So far, quite well. But I'm not just blindly buying the stocks the site spits out, I'm digging a little deeper and buying those stocks. (For example, I avoided the Chinese RTO stocks purely out of fear of the authenticity of their numbers. Which turned out as a good move as most of the Chinese RTO stocks were indeed fraudulent and have since halted trading). My returns have beaten the S&P so far. 

For really detailed analysis on the MFI approach, go to the MFI Diary: http://justadrone.blogspot.ca/ He's done a LOT of work, and his research shows that the MFI strategy in fact does *NOT*work very well over a long period of time. But that is based off of buying every stock on the MFI list (over 100M I think) each month, and holding for one year. I, personally, wouldn't touch some of those stocks EVER, so deeper inspection is needed to weed out the real stinkers (looking for deep value stocks not value traps)



Island said:


> My suspicion is that because the Canadian market is smaller, it should make the strategy work better, not worse.


That would make sense, but boy, the list sure is small when you use the general screening tools. You might get 10-15 stocks that meet the criteria, of which a good number need to be excluded and some are duplicates month after month. So you may get 4 real candidates to dig into. Way too few for me. 



Island said:


> I'm currently 6 months into using the strategy in the book for the US portion of my holdings buying 2 stocks every month.


I'm doing 6 per quarter. 24 in total. Takes a while to research, so I only ever want to do this every 4 months :chuncky:

The hardest part is watching a stock you think is a winner get killed in the market. I just hold on and ride it out for a year. The ONLY exception I make is when something extraordinary happens. Like a buyout offer or rumor driving up the price of a stock. If I get a huge run up in price, I'll sell 1/2 my position and sit on the remaining shares.


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## Xoron (Jun 22, 2010)

And yes, I am a bit of an MFI fanboy :rolleyes2:


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## Young&Ambitious (Aug 11, 2010)

I haven't read the book but it's on my to-read list. What is the rationale for no banks or utilities?


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## Xoron (Jun 22, 2010)

From what I remember the ranking system used is skewed when financials and utilities are included. Which is one reason it doesn't work all that well in Canada


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## namelessone (Sep 28, 2012)

You're missing out if you exclude financial stocks in Canada.


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## Xoron (Jun 22, 2010)

namelessone said:


> You're missing out if you exclude financial stocks in Canada.


Which is why I don't use MFI for my Canadian allocation.

Interesting thing, the MFI diary did a special "Canadian" edition of the MFI list. Check it out:
http://justadrone.blogspot.ca/2012/11/greetings-canadian-readers.html


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## namelessone (Sep 28, 2012)

gibor said:


> I did similar screening, added dividend-payer and couple of more selection, here what I got
> 
> PGF
> CTU.A
> ...


Thanks for the list. Just bought some RET.


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## Xoron (Jun 22, 2010)

namelessone said:


> Thanks for the list. Just bought some RET.


I hope you noticed that the list posted by gibor was from 2011. Not sure if that stock would still be considered an MFI stock.


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## Island (Sep 6, 2012)

Thanks for all your posts Xoron - I'm finding some of the links you've posted very useful.


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## gibor365 (Apr 1, 2011)

I took in library and reading now book that has great reviews "Get Rich with Dividends: A Proven System for Earning Double-Digit Returns " by Marc Lichtenfeld. He's writing about 10-11-12 system. Interesting reading and nice numbers.... just he gives example and advocates buying stock who consistently increases dividends , has yield 5% and annual dividend growth 10%.... The problem is that ... there is no such stocks 
and the closest to this criteria like a couple like MO.N, maybe PM.N and BCE.....


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## lonewolf (Jun 12, 2012)

Near historic lows dividend yield & PE ratio are near the same. @ historic tops dividend yields are lower then they were @ the historic bottoms & PE ratios higher @ the historic tops then they are @ the historic bottoms. ( i remember seeing a chart years ago that showed this)

This makes me wonder if it is best to buy stocks the moment they stop raising the dividends & start lowering them ?

I dont follow PE ratios but I have heard creative accounting is often used & the PE ratio is not calculated the same way as it used to be calculated ?


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