lundi 10 juillet 2017

Back to the magic formula

I've written about Joel Greenblatt's magic formula a few times since the inception of this blog.

The concept is simple and interesting:

1- Using a screener (you can use the one on, select 30 or 50 stocks with a specific market cap (for the example below, I've used a minimum market cap of 343 millions $);
2- You'll get a list of the highest ROE/lowest PE stocks on the market;
3- If you don't like some stocks, don't pick them. But keep at least 20 stocks and put the same percentage of your portfolio on each stock (20 stocks = 5% each);
4- Hold your stocks for one year, then sell them.

Using that method, you should beat the market 96% of the time with an average 17 years return of 30,8%, which is amazing. There's some website saying that the results will be well below 30%, but will still crush the market.

So far, 2017 has been a little disapointing for me. My portfolio's performance has been very slightly positive. In these times of deception, I'm tempted to look for a new messiah even if I hold pretty good stocks in my portfolio. I strongly believe that you should be faithful to great stocks instead of trying to find new obscure stocks.  But, maybe there's something better than being faithful?

I may change my mind one day. After all, it's been at least 3 years since I've been thinking about using that magic formula. And for the last 3 years I've achieved so-so results (thanks to Valeant and Concordia).


I went back to the site to try the magic formula once again... And here's what it looks like.

Is there anybody using that formula in a robotic way, year after year?


Enter two simple stock selection criteria and MagicFormula will select top stocks for your investment portfolio.
Minimum Market Cap

Number of Stocks
30 50

AMAG Pharma
AMC Networks
American Outdoor Brands
Argan Inc.
H&R Block Inc.
BP Prudhoe Bay Royalty Trust Inc
Cisco Systems
Deluxe Corp
Express Scripts
GameStop Corp.
Motorcar Parts of America
MSG Networks Inc.
PDL BioPharma Inc.
Pitney Bowes
Sucampo Pharma
United Therapeutics
USANA Heatlth

5 commentaires:

  1. Does anyone use Investors Business Daily for picks and if so, digital or print and where do you buy your print editions?

    Stock picking is too interesting to allow some random pick generator decide what I'm going to invest in. I prefer to gather information from as many sources as I can to determine who to ride their coattails and hopefully catch some upside. That is what lead me to this blog.


  2. The market can be a frustrating beast. Even the best of investors hit slack periods where their methods can stop working for awhile. Sometimes the markets rotate away from a certain style of investing.

    I’m a member of Greenblatt’s site and I believe in his approach. The problem lies within the psychology of the investor. There will be times when his system doesn’t work for awhile and the investor will be tempted to give it up and try something else. Imagine giving up on it just before it starts working again. Think of the psychological damage that would cause. Such is the nature of the markets.

    Just as companies have life cycles, so do investors. I’ve been in the market for 9 years now and intensely so for the last seven years. I’ve learned a lot but the market is unrelenting in teaching me new lessons. I think the longer you invest the better you get with experience. And I think you learn your most valuable lessons from your mistakes. I find my intuition (inner knowing) is starting to play a bigger role in my investing approach.

    I think Greenblatt’s magic formula would make an excellent stock screen. There is more to investing than believing the raw numbers. Each stock has a story behind it and when you combine that with some of the company’s metrics I think you get a fuller picture of what is happening on the corporate front.

    As time passes I think an investor develops an investing philosophy that suits his temperament and in times of trouble will help act as an anchor to keep the individual investor being swept out to sea.

  3. I consult the Magic Recipe Spell from time to time ( I agree with Twotime that you need to gather the story behind. There is some unexciting ones such as Western Union and HR Block but also some no brainers such as TJX, Ross or CGI.
    I read the paper edition of IBD periodicaly from the magazine shop. You must be into momemtum stocks and catch the wave at the right time. IBD is interesting to get some emerging names without paying for a stock newsletter, but again, predicting future earnings is the thoughest part, always. Look like the Motley Fool sometimes with hot stocks of the moment....wait, we've got 10 stocks that we like more than.....

  4. What magazine shop do you find IBD? About 3 months ago I had friends in the Toronto nail salon industry search for it with no luck. Last week I found a copy in the Whitby Town Center. I'm in Belleville. What is the closest place to find this paper?

    IBD is great for new ideas. I like finding small-mid cap stocks that are consistently reported or commented on before I investigate. Stocktwits is also good but I don't react to the BS people post. Rather I try to see what is repeatedly commented on to see whats new and upcoming. I allocate probably 1/4 of my portfolio to these stocks but the rest is in compounders like CSU, BYD.UN, OTEX, etc.

  5. I just let my IBD subscription lapse. They used to have a daily paper... print and electronically and now it's weekly. They are good and I like their approach but frankly I'm doing this type of work on my own now.