PICKING THE STOCKS
I thought this would be simple - just go to the website and pick the stocks. I had $55,000 to invest - so I figured about $2000 for 25 stocks and $5000 as reserve.
The website http://www.magicformulainvesting.com/ is so simple - but you still have to make choices - minimum market cap, and how many companies in the list.
My background comes into play - I have an undergrad in Business Finance and an MBA - so I know how to read financial statements - know about ratios - analysts - etc.
I tried a couple of minimum market caps and saw how the results for the companies changed - then I just settled on anything above $100 million cap (there were only very few picks below this to begin with) - the formula is supposed to work for all size market caps - but I wanted to include smaller to medium companies.
Checking out the list - no I did NOT just buy the top 25 - I had to go and see what I had there in the list - exported the list to Yahoo and checked all the ratios / headlines / and so on for the stocks.
Narrowing the List - Cherry picking - what I was not supposed to do ..
I tried using just the 25 - but I saw some immediate red flags !!! Some of the stocks had big short ratios -- more than 20% of the float out there was shorted - I kicked those out. Some companies had just announced BAD news -- I kicked those and realized I needed to start with 50 to narrow the field.
SO - There were 50 stocks I looked at - I had to narrow it down again. Short ratios - I kicked out anything that had more than 10% of the float shorted (except for one company Portalplayer -- who's stock / price / value / outlook looked so good - I just could not explain the low price - they make the IPOD semiconductors) . Kicked out anything in terms of recent news that looked funny - kicked out a few where the analysts really turned - in short anything that look strange.
I was left with about 30 stocks - so I needed to cut further. There were a lot of clothing manufacturers and energy stcoks -- and I did not want risk the exposure to focus too much on those - so I just narrowed it down and I did not pick stocks that would have earnings announcements in the next 2 days.
The entire process took me about 6 hours - not a lot of time for all the money I was investing - I finished up with 24 stcoks.
posted by Erik Hochstein @ 12:41 PM
2 Comments:
Wow...your pretty bold...i commend you for just going for it!
I just wanted to mention...you should *really* read the book though...it's very short and it will give you just a tad bit more of an understanding as to why his formula *may* work into the future...and as an added bonus probably relieve a bit of that wake-up-everyday-and-check-your-position stress.
His system works on *average* [critical point 1] over a diversified [critical point 2] portfolio of *magic formula* [critical point 3] companies over a long period of time 3-5 years *at-least* [critical point 4]. This is because the market never lies over the long term but is incredibly fickle in the short term and truly great undervalued companies will attain their true value over longer periods of time [critical point 5].
Hence the patience component!
He also mentions the best way to start is to average into your total holdings over the course of the year, ie.
buy 2-3 stocks per month for 12 months = 20 - 30 stocks
buy 4-5 stocks every 2 months = 20 - 30 stocks
That way you average out general market conditions along the way as an added bonus.
Your plan of jumping right in will probably also work over the long term...you just may experience a bit more stress initially.
Those big short ratios that you eliminated may reduce your overall results. As Buffett says, buy when others are fearful. While I respect the short-side of the argument and like to hear what they have to say, you're blindly relying on the judgment of others to make this "avoid" decision for you, and they are anonymous others at that, not someone like Greenblatt who we can read and evaluate on our own.
Similar comment on the bad news avoidance strategy. If you can determine that the bad news is temporary or overblown, this may be something to seek out rather than avoid.
It might be more prudent to eliminate risk in other ways, such as your plan to avoid putting too much into any one industry; or avoiding companies that have a debt/capitalization ratio higher than X; or avoiding companies that receive more than Y% of their revenue from one customer.
Good luck. I'm using MFI to invest real money too.
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