Magic Formula Investing

Using the Magic Formula for investing; based on "The Little Book that Beats the Market" I started a real life test with $50,000 of my own money. The blog described the process, thoughts, pain and ongoing updates on this adventure.

Friday, March 02, 2007

MFI and the market correction

Sometimes it's better to be lucky than smart -- sometimes it's better to be lucky than good at a particular task. I play a little bit of online poker for small stakes and if there is one thing you learn in poker it is that "luck can beat good play any day - any time".

Why is this relevant to investing -- well, you can do all the research and pretend to have these great market insights, but very often, a little bit of luck can change your fortune. Of course, similiar to the poker example, in the long run, good play should and probably will prevail - but one should always remember, that there is an element of chance or just pure luck.

Why is this relevant to my portfolio -- I got up on Monday morning on the 1 year and 2 day anniversary of my Magic Formula Investing start and sold 7 of my top gainers for the one year. While I considered to replace them right away, my target stocks all seemed to have been on a little bit of a run (maybe that was a sign) - so I was waiting on a "dip" (always be careful what you wish for). So I only replaced 2 of the 7 stocks and left about 20% of my portfolio in cash. Of course Tuesday was the meltdown and I got very lucky in terms of market timing - there was no skill, no reading of the market conditions or anything like that. So now, I can wait a couple of more days and let things calm down to look for stocks that just experienced the "dip" I was hoping for.