2009 brings new beginnings

With the new year, I intend to again start investing following the Magic Formula process. I had previously invested, and still own some stocks, following the strategy outlined in "The Little Book that Beats the Market" by Joel Greenblatt, but with the recent new lows of the Market, it may be a good time to kick start this process again. I plan on following my previous approach of buying a handful (4-6) of stocks every quarter, and selling after a year's time - unless one of those stocks are still on the Magic Formula list. Along with the pure ranking process, I will analyze the initial results set of stocks to try to weed out those that appear on the list due to negative fundamentals which artificially inflate the Earning Yield and/or the Return On Capital.

As there is activity in my portfolio, I will post the latest changes and results to provide visibility into how effective my implementation of this strategy actually is.

2007 Update

It's been a few months since my last post and I still haven't bought the stocks for my next portfolio. February also marks the 1 year date for Portfolio 1, which means it's time to sell it. Hopefully, I can decide on the stocks for Portfolio 3. In the meantime, Portfolio 2 has done extremely well in the last few months and has passed the returns of Portfolio 1. With a 40% return including dividends after just 6 months, I am considering selling the portfolio and putting the cash in a MMF to preserve my gains. In any case, here are the returns for my 2 portfolios...

The average (not annualized) returns for both portfolios is 33.9% including dividends.

Returns to Date

Here are my returns for each portfolio as of November 17, 2006...



As you can see, both portfolios are doing relatively well. The Return column shows the return for the Portfolio. The Index Return over Same Period values are the returns of each index starting with the Purchase Date. And the Performance Against Index shows the delta between the Portfolio's returns and the Index Returns. Portfolio 1 is crushing all 3 indices and Portfolio 2 is also beating each index, while also returning almost 13% in under 3 months. No complaints so far. Given Portfolio 1's strong performance to date, I am considering selling it and putting the cash in a 3 month CD to protect the returns. But I don't want to miss out on any end of year rally that may occur.

Currently, I am in the process of picking stocks for Portfolio 3. I'll share these picks in my next post.

My Approach

So, before I can talk about performance, you'll need to know how I'm approaching this. I typically buy 5-7 stocks each quarter and allocate equal amounts to each stock. Per the Magic Formula strategy, I intend to hold them for a year and then sell them. However, I keep open the possibility of selling positions before the year is up if the gains are significant. Since I am holding these stocks in a tax deferred account, I don't have to consider short-term/long-term tax implications.

I created my first portfolio in February 2006. I didn't create a portfolio in the next quarter due to a lack of time to do proper analysis, but I did create one in August. I group by 'portfolio' for tracking purposes. So without further adieu, here are my two existing portfolios.

Portfolio 1: ANIK, EGY, KG, ITWO, PWEI, UST, PWEI
Portfolio 2: AGYS, ASEI, ASPV, FDG, PNCL, UNTD

In my next post, I'll discuss the performance of each portfolio.

The Road to Riches...episode 1

Given that this is the first post, I figure I should give you some details on what this blog is all about. But first, some background. About a year ago, I read Joel Greenblatt's "The Little Book that Beats the Market." In it he details how his investment strategy has returned on average about 30% per year for the past 17 years. As a long-time individual investor getting closer to 10% a year, I was very intrigued at the prospect of getting those results for myself. Greenblatt's "Magic Formula" is fairly simple - he looks at the largest 3500 companies across all US exchanges and then force ranks them based on their Return On Capital. Then he re-ranks them based on Earnings Yield. To get their overall ranking, he adds their place on each list and ranks them again. The lower the number, the better the theoretical investment that stock is. So, that brings me back to what this blog is all about. I plan to track my investment performance based on the Magic Formula and compare it to market averages over the same time frame. Going forward, my posts will be on updates of my portfolio returns and discussions on stocks that fit the Magic Formula profile.