dimanche 31 août 2014

Using the Magic Formula

I'm seriously thinking about using the magic formula (TM: Joel Greenblatt) in a near future.

This link show us that, from 1988 to 2009, the magic formula compound annual growth was about 24%.

Fuck. It means that in about 3 years, your money has doubled.

I've written a bit about it before, but this method consists roughly of selecting 20 to 30 stocks, of equal weight in your portfolio. You chose all the stocks for which the ratio between ROE and PE is the highest. And you repeat this exercice every year. That's the method used by Jason Donville for selecting a lot of his stocks.

Let's see some examples:

Forward PE: 15
ROE: 45

Forward PE: 16
ROE: 35
ROE/PE: 2,2

Those two would be good candidates for a magic formula portfolio because you get a good ratio (the ROE is at least twice the forward PE ratio). Jason Donville establishes that a ratio higher than 2 means that the company would be a good buy.

One of the biggest ratio you could get is the one of IBM

Forward PE: 10
ROE: 95
ROE/PE: 9,5

In these times where value is hard to find, maybe we should put our faith in magic. A lot of great investors are in a stand still mode. So, let's be humble and do the same as those rich mofos. Or, let's put all our fucking money in Berkshire Hathaway. Or, dare I say, let's put our faith in magic.

So here's a list of some stocks that could be great choices in a magic formula portfolio.


Cipher Pharma
High Arctic Energy Services


Gilead Sciences
Smith and Wesson
Ross Stores
Nu Skin (watch out, but very cheap)
Herbalife (watch out, but very cheap)

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