Introducing The Magic Formula
The Little Book That Beats the Market
I want to test Greenblatt's magic formula. For the next year I will keep track of his results. We'll call it the MagicFormula Index. From his website www.MagicFormulaInvesting.com, I applied his formula and ran the following search: top 25 companies with a minimum market capitalization of $100 million. Here are the results and closing prices as of December 12. Let's invest a fictional $100,000 and see where we end up on December 12, 2007.
- Aspreva Pharmaceuticals Corp. (ASPV), $19.70
- Biovail Corp. (BVF), $21.00
- Cavco Industries Inc. (CVCO), $34.41
- EPIQ Systems Inc. (EPIQ), $15.76
- Earthlink Inc. (ELNK), $6.42
- Fording Canadian Coal Trust (FDG), $22.58
- Freight Car America Inc. (RAIL), $53.39
- Frontier Oil Corp. (FTO), $31.34
- Harvest Natural Resources Inc. (HNR), $10.21
- King Pharmaceuticals Inc. (KG), $16.56
- Korn/Ferry International (KFY), $22.30
- Mannatech Inc. (MTEX), $13.46
- New Frontier Media Inc.(NOOF), $9.31
- OmniVision Technologies Inc. (OVTI), $14.59
- PW Eagle (PWEI), $34.96
- Palm Inc. (PALM), $14.01
- Pinnacle Airlines Corp. (PNCL), $10.34
- PortalPlayer Inc. (PLAY), $13.40
- True Religion Apparel Inc. (TRLG), $15.41
- United Online Inc. (UNTD), $13.38
- Vaalco Energy Inc. (EGY), $7.97
- Valassis Communications Inc. (VCI), $16.44
- Verigy Ltd. (VRGY), $18.06
- ViroPharma Inc. (VPHM), $14.99
- Western Refining Inc. (WNR), $27.17
The Sacramento Executive
Comments
How are you allocating the 100k? Evenly between all companies? "Buying" an equal number of shares in all? Or will it be weighted to favor some companies over others?
And where will you be tracking this experiment? I've put together a mock portfolio for it at Google Finance, but there doesn't seem to be a way to share it.
Today you'd have made $453.18.
Posted by: Adam Kalsey | December 13, 2006 6:16 PM
Adam,
I assume an investment of $4k per stock. I will post the results daily. The results will not include transaction costs and dividends.
Pierre Cutler
The Sacramento Executive
Posted by: Pierre Cutler | December 13, 2006 7:30 PM
That's how I allocated my mock portfolio, too. I allotted $4k to each stock and rounded partial shares to the next nearest share. As a result, I didn't spend exactly $100k, but it's close.
I wish there was a good way to share a mock portfolio like this with others. A blog sidebar widget would be nice.
Posted by: Adam Kalsey | December 14, 2006 9:20 AM
The correct procedure is to buy a quarter of the stocks now, another quarter in 3 months, etc. etc. until all the money is invested - otherwise you may get different results than Greenblatt.
Posted by: Nate Shabidoo | December 14, 2006 1:49 PM
Nate, you are correct in that quarterly investments are recommended by Greenblatt. We will get different results regardless, because of our start date and search criteria. Nonetheless, it should be fun and informative.
Adam, I would like to figure out how to post the 25 stocks in the portfolio in one of the border columns, and show original invesment price, current price and gain/loss. This would require access to a realtime feed. Any ideas on how to do this? I am limited to 180 pixels in width.
Pierre Cutler
The Sacramento Executive
Posted by: Pierre Cutler | December 14, 2006 4:10 PM
Pierre,
I read Joel Greenblatt's Little Book last year at this time and invested in 20 of his criteria-qualifying companies. I achieved a 92% return. I sold that crop over the last two weeks and have begun buying the new crop to hold for another year. I had 9 abject losers and 11 winners, of varying shades of profit. The largest (NUE) gained substantially, especially over the last few months. Others like MVL, UST, AEOS and HOG also registered excellent advances. What a great little method to beat the market.
Keenan Davis
Posted by: Keenan Davis | December 26, 2006 12:01 AM