Magic Formula Investing

MFI and the market correction

2007-03-02T09:19:00.000-08:00

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.

Did FCX win the Lottery ?

2007-02-25T10:01:00.000-08:00

I had an idea for a new posting - this may be interesting.

I thinkthere is always a reason that any stock shows up on the MFI list. It may be fun / interesting to talk about the various reasons stock by stock.

Let me start with this one - FCX - has been on the top 25 MFI ever since I first looked at the list and I actually have the stock for a year now. Why are they on the list ?

- Copper and Gold prices

I am not a stock analyst or financial expert - but it seems rather simple in this case - FCX has been around for 100 years or so - they mine Copper and Gold - the stars have aligned and copper prices went through the roof (gold as well - i think). Don't know much about details for the commodities market - but I know prices will even out eventually.

The only other question is - what is FCX doing with it's cash windfall ? Looks like they are buying a competitor - PhelpsDodge (also on the list). I don't know - but that reminds me of a lotto winner going on ashopping trip >>> I think I am selling this week (my year is up).

More Information for Magic Formula Investing - 1 year

2007-02-24T10:47:00.000-08:00

Here are some detailed numbers of my portfolio compared to the SP500 -- the first number always represents my Portfolio and the 2nd is the SP 500 --- PLEASE COMMENT - I AM VERY INTERESTED IN OTHER OPINIONS HERE :

Stock Sectors - No real surprise here -- very much within the ranges.:
Information
20.79 19.98

Service
42.8 46.76

Manufacturing
36.40 33.25

Within Information - some differences, but I think one stock could make those differences:
Software 9.68 3.49
Hardware 6.18 9.53
Media 3.08 3.46
Teleco 1.84 3.50

SERVICES - of course no financial services - seems like that all goes towards business services
Healthcare 11.91 12.71
Consumer Services 10.96 7.72
Business Services 19.94 4.06
Financial Services 0.00 22.27

Manufacturing - little surprise here - I figured I would have more Energy stocks:
Consumer Goods 19.00 8.64
Industrial Materials 13.72 11.89
Energy 3.68 9.32
Utilities 0.00 3.40

STOCK TYPE -- lots of speculation - which I am not sure that makes sense. To me speculative stocks show future promise - but the screen makes sure these stocks do give a solid return ???

High Yield 15.03 12.23
Distressed 5.71 0.35
Hard Asset 6.81 10.54
Cyclical 11.44 11.26
Slow Growth 17.38 12.13
Classic Growth 16.70 40.20
Aggressive Growth 2.38 9.76
Speculative Growth 24.55 2.86

The last set of numbers -- SP 500 = 1
These are the most telling set of numbers. Forward PE ratio is the same as SP 500. That is somewhat surprising - the size of my companies is very small and 1/4 of them are spec. growth stocks. Then the projected EPS growth is 1.28 -- again that seems very solid. Price / Book ratio - this is where the MFI screens really start showing 2.58 vs. 1 - BIG difference. ROA is better and of course ROE should be very good - 1.61 vs 1 .

Price/Earning Forward 14.69 0.97
Projected EPS Growth - 5 yr % 14.25 1.28
Price/Book Ratio 2.58 1.01
Yield % 1.31 0.81
Return on Asset (ROA) 14.25 1.32
Average Market Cap $mil 760.37 0.02
Return on Equity (ROE) 31.69 1.61

Magic Formula Investing Anniversary - Overall Return

2007-02-24T10:29:00.000-08:00

I know - I am celebrating too often for my 1 year anniversary - but yesterday was the actual date - and I got lots of numbers to throw around:

Return of the original 20 purchases = 31.2%
Index comparison are at about 15%
Mutual Fund comparison would be Small Blend -- Category 1 year return is 12.8%

I bought more stocks as the year went so my current actual overall portfolio is at 29.1%. If I would have bought with equal $ amounts throughout the year, I would be at 25.4% ( you can see that I got a little lucky with the Feb purchases) - that is a number many mutual funds use when they do their returns.

The overall return numbers are VERY good -- there are only 2 mutual funds in the Small Cap category that have done better than 30%. And even the 25% number would still be in the top1% for mutual funds in that category - with expenses at.25%

No need to say that I am moving ahead with my Magic Formula investments - although I am not expecting (of course one can always hope) to duplicate this success.

Paris Hilton was taken, Britney Spears is in rehab and Anna Nicole ...

2007-02-22T11:05:00.000-08:00

K-Swiss just announced a poor outlook for 2007 and the stock dropped 13% today. I know this - of course - because I have owned k-Swiss for almost a year now. I was just about to decide if I should sell them or keep them - the stock is still on the list.

I think they made the decision for me. I don't care so much about the earnings - the poor 2007 outlook - all the cash they are hording - the financials - and all that stuff. It's really secondary to the decision to have

"Anna Kournikova As New Spokesperson for the Brand" .

I am sports guy and I understand that big time athletes promote brands - but what message are you providing with having Anna Kournikova as your spokesperson. Let's see:
- Looks are more important than winning
- I could be top 10 tennis player, but I am rather a top 10 bimbo
- Hard work is overrated
- Paris Hilton was taken, Britney Spears is in rehab and Anna Nicole ...
- Who cares about the quality of the shoe, as long as it looks good

What are they thinking ???

Batman, Robin and Joel Greenblatt II

2007-02-21T21:41:00.000-08:00

All superhero movies have a sequel - so why not this post ? Although I am not sure I can go as far as the Batman sequels - they must be at number 5 or 6 by now.

Somebody pointed out on the Yahoo Magic Formula group that the Gotham fund only represents their stock investments and we do not really know about their other investments - which is a good point. But Greenblatt is famous for focusing on 5-8 stocks in the portfolio and I believe the historical returns of his funds are based just on these stocks funds. They had about 6 stocks a year ago -but now it's just those 2. And on top of that -- options - (sorry I just can't get over that)

You must have the following convictions for doing this:
- total faith in the overall market not having an adjustment >> even a 10-15% adjustment could wipe out the total investment - so there must be very little concern about that happening.

- believe in these stocks to really gain fairly quickly >> I guess one could sell the options and buy new ones - but the turnaround cost are pretty high and with this type of volume it can't be that easy to make buy and sell decisions. So no 2-3 year window here ..

- believe the stocks really take off >> again, these are option investments - the volume can be a big problem. A 30% gain may mean very little if you can't sell and turn into a much smaller return. I am not an expert on options - but I see my gains not fully materialize on good days and the volume is soooo low.

Batman, Robin and Joel Greenblatt

2007-02-20T09:41:00.000-08:00

I know this was talked about before, but I always like to track and see what investments our dear author Joel Greenblatt has his money invested in. You can check the SEC filings for Gotham Capital - but it trails by 6 weeks.

Right away - you have to like the name - Gotham Capital. Not sure what his reason was for the name was, but I always think of Batman. And since we are investing according to his theory, that makes us Robin.

There are a couple of funds listed under the name and I am going to spare you the details - but the core investments boil down to 2 stocks. That fact alone is quite unbelievable - they have all their money invested in only 2 stocks !!!! Even if it is not your own money - or maybe that makes it even more gutsy - you have to have a lot of conviction to limit your investments to 2 stocks. So much for spreading your portfolio and limiting your risk.

The companies are Wal-Mart and American Express -- that does not sound so exciting. I thought Batman was a superhero and he would pull out some crazy company that builds "batmobiles" or something like that ??

If you look further - you see that they mostly bought call options for both companies -- OPTIONS !! Options ???? They must be really convinced - on the other hand - how can you return some 40% by buying regular shares of Walmart. Well was enough info for me to take a closer look -- I tracked to see the timing of the purchases by checking the quarterly statements and then I checked the price levels of both stocks in that time period. I did this for both - but for some reason I concentrated on Wal-Mart and only remember the numbers for them. The options were bought in Q1 of 2006 - the stock was in the 44 - 46 range and they bought A LOT OF THEM. I am actually not certain about the value of the options they have to report to the SEC. It seems that they have to report the number of underlying shares and the value of the shares - but not the actual value of the options. Which actually means that although the listed investment value of the fund is over a $1 billion - the actual market value may be much lower -- please somebody correct me on this one.
Keeping going - it's not easy to buy that many options even for a stock like Wal-Mart. They have options for about 15 million shares -- meaning about 150,000 options contracts. I think looking at the volume of Wal-Mart options and the outstanding contracts it's easy to assume that a large number of these options (probably all) are Jan 2008 $40 calls.
Well - since I invested so much money in the MFI stocks - I thought I might as well follow this one as well and I bought 5 of the Jan 08 $40 contracts about 4 months ago. Sure enough - after slight gains for the the first 3 month, Walmart just announced good earnings and went up 3.6%. That is of course a small gain compared to many other companies - but in world of options, you always have to use the great multiplier - in this case it's about 4-5.
Looks like Batman is still may favourite superhero - although it's a lot easier to write about a success than admitting a failure.

And I thought this was getting easier !!

2007-02-20T09:28:00.000-08:00

Along the lines of the "Less is More" posting - I just realized that I am going to have some serious issues in picking my next round of stocks. I had bought 20 back in Feb 06 - so I am going to have to replace at least 15 over the next few weeks. The problem is that I either own or have researched about 45 out of the 50 stocks on the top 50 list. What to do now ???

I don't like buying any of the stocks that still show earnings 3 month behind or more)- that usually takes 10-15 out right away. Then I throw out any total nightmares - just don't have the stomach for some of the filing violations and delistings. By the time I take out the stocks I already own and the one's I did not previously buy for whatever reason, I am left with about 5 stocks. I need to buy 15 !!!!! Now, I guess I am going to have to increase my list to the top 100 MFI screen. But would you not rather have top 50 compared to top 100 -- and did the book not tell us that the stocks to perform in order ??

So many questions - and I thought after one year, I would have an easy way to pick stocks.

Magic Formula Investing results

2007-02-18T09:17:00.000-08:00

Here is a look at my portfolios monthly returns:
- started with 20 stocks and then added about 6-7 every quarter
- now at 36 stocks; started selling 2 no gainers (close to 1 yr)
- 5 stocks were sold early for various reasons (3 buyouts / 1 tax and1 I just did not like)

MonthlyReturn of Total Return / Personal Return / Index Return

Mar 7.01 7.35 4.88
Apr 3.7 3.7 1.4
May -9.22 -9.82 -6.06
Jun 4.13 4.13 1.38
Jul -2.16 -2.16 -2.85
Aug 4.18 4.29 3.13
Sep -0.9 -0.9 0.74
Oct 4.61 6.2 6.04
Nov 3.76 3.57 2.5
Dec 1.2 1.2 -0.24
Jan 1.34 1.34 1.91
Feb 4.69 4.65 2.1

I used the Morningstar Small Core Index as a comparison. The TotalReturn is what Mutual Funds would use to list their returns (and anindex comparison) -- Personal Return includes cash in and outflows(you can see that during the month of the purchases -May / Aug / Nov -the personal and total return vary because of cash in and outflow)
Trends:
1) Overall I am doing great: + 28% total return // +25% personalreturn VS the index of 15% (SP500 would be about the same).

2) The May numbers serve as a cautious reminder that in a downturn,the portfolio may take a big beating -- market was down 6% vsportfolio at -9.8% - which is also the biggest monthly difference(positive or negative) of any month.

3) Transaction cost -- Even at 43 stocks the transaction costs arerelatively low -- 43x$6 ($3 per trade)= $258 or about 1/4% of value

4) Tough to track dividends - I use Morningstar and they recorddividends by reinvesting the $$ into the shares - I wish it was thateasy. The money usually just sits there for a couple of month until Ican invest it into new buys. It comes down to just being a little tolazy to make my own spreadsheet analysis - but I just add about 1%and don't get obsessed about it.

Less is more !!!

2007-02-16T08:57:00.000-08:00

After one year of MFI I have come to the conclusion that "less is more" in terms of analysis of the stocks I buy and own. Well, not 100% less (or complete faith) - meaning no self research, but anything more than 5 minutes per stock is not a good idea for myself.
There is always a reason that a stock is on the MFI list -- earnings hike is just a one-time thing; future earnings outlook is dreadful because industry in total decline (check business - forgot the name - did not buy the stock); oil field is somewhere in Africa and political problems (EGY); copper prices are only up temporarily (FCX); all business is with one customer who may choose to take a hike (my nightmare with Portalplayer) -- there is always a reason and you should be able to see the reason within 5 minutes. Usually there is a break in the chart and all you have to do is check for the news around that time.
Once I am past the 5 minute mark and especially if I don't see the obvious reason - I am in trouble, because I start "liking" the stock more than I should. I just could not understand why Portalplayer was on the list with being part of the most successful consumer product this decade (IPOD) -- so I bought more stock "outside" of my MFI portfolio - BIG mistake.
The almost made the same mistake with Grubb-Ellis - the commercial real estate company - I can't figure out why the stock is so low. There are buy-outs in the industry - the stock is valued very low and Grubb-Ellis has a good name. I can't quite figure out the ownership situation and classes of stocks they have sold - which I think is the reason the stock is not doing very well. But I went beyond my 5 minutes and spent a lot of time on this and it is just not very useful.
Blind faith - or picking at total random has not worked either. I picked my May portfolio of 7 stocks at random and they are not doing so well (about 2% gain vs 15 for indexes). There were 2 stocks in particular, I almost knew would be dogs right after I bought them - National Dentex and Toptanker.
So in the future, I am going to stick to the 5 minute rule and finding the reason, each stock is on the MFI - but that's just for me.

I hate trying to time the market !!!

2007-02-15T14:19:00.000-08:00

One of the main reasons I was initially attracted to the MFI formula was the simplicity of it. I am not pretending to be an expert stock picker, but I do have a good understanding of the financial markets, reading accounting statements and all that good info out there.
The MFI formula seems to be a great way to pick a diverse group of stocks that provide the opportunity to make above market returns.
But even once you have picked the stocks - most experts will tell you that you can probably buy the chosen stock cheaper by just waiting it out for a few weeks and not buy while the stock has been gaining for 3 straight days and not sell while the stock is under a 2 day downturn.

So - I wanted to sell Grubb Ellis - GBE after it had given me a -4% return over the past year. I bought it at 11.3 and it went as high as 14 and as low as 8 but it seemed like a good time to sell. Earnings were released a week before (mixed) and the stock was on a little bit of an upturn - gaining from 10.40 to about 10.90 over a week's time. I sold and the rally just got a little steam today with a 5% gain (for absolutely no good reason what so ever ) and 4x average volume.

So much for trying to find a good time to sell or buy .....

What to do - what to do

2007-02-14T10:34:00.000-08:00

Closing in on my one year MFI - Magic Formula Investing - anniversary:

Here are the overall results: Portfolio up 27% - that is GREAT !!! and here are more details:

Initial Investment: $49885 increased to $63340 (includes div and minus transaction $$)

Index compare over same time period:
Dow + 14.8 %
SP + 12.8 %
Russel 2000 + 7.1%

So far so good - but I also have to add that the stocks I purchased in May (7 of them) are trailing all the indexes quite a bit - so this recap post will look different in 3 month.

Now I am faced with the decision on which stocks to sell and which one's to keep. Here is the list of stocks and the current % results:

CHKE 13.19%
CSGS 13.77%
EGY 4.40% *
ENDP -1.54%
FCX 7.03% *
FTD 110.38%
GBE -1.97%
HAS 40.08%
INSP -5.07%
ITWO 56.41%
KFY 18.46% *
KSWS 13.36% *
NTGR 54.03%
SYNA 8.35%
UST 51.44%
VPHM 55.27% *

I already sold 2 -- GBE and INSP -- and I have a few that are still on the MFI list (noted with *)

Other stocks still look very solid - although if I follow MFI, I should probably sell all that are not on the list any more. Maybe I should keep some of the stars -- FTD does flowers and they will probably blow their numbers away over Valentines. Hasbro recalled a million easy-bake ovens and the stock did not even blink. What to do - what to do ...

Flowers

2007-02-06T10:00:00.000-08:00

I should have known -- I invested about $50,000 in 20 different stocks about 1 year ago (anniversary coming up Feb23 ). And today I got my first 100% gainer - FTD Group - they do flowers. Now I just told this to my wife, who really is not very much into stocks and she said "Of course - I could have told you that - people will always buy flowers - and don't forget that Valentines is coming up".

Out of the 20 stocks, this was about the last one I expected to double - but this is part of the learning experience in MFI - it does not matter what the business is - the company has to do it better than others.

Closing in on 1 year Anniversary

2007-01-09T09:23:00.000-08:00

My MFI - one year anniversary will be in Feb -- The overall results so far have been mixed - here are some details:

Bought 23 different stocks in Feb -- I sold 3 of them early -- one I got down on and just could not see it through any more (Motorola - good decision, I guess). One tanked then went up a little bit and then got bought ( Portalplayer - see my earlier posts in this one). And I sold my biggest gainer for tax reasons -- American Eagle went up some 85% -- I sold it in December, because I had some losses (Portalplayer), and I figured this would be tax effective.

So my Feb - purchases are up 22% overall -- compared to about 10-12% gain for SP500, Dow, or NASDAQ over the same time period.

I also have 3 other buying periods, where I added 8-10 stocks (May, Aug, Nov) -- those have NOT done so well - but they also have a little longer to come back ... Overall that group is up about 3%.

Where does that leave me overall -- About the same as most popular mutual funds - between 10 and 12 %.

What I have not added in here is the Learning aspect and the System (ease of decision) aspect - which I will explore in my next blogs.

New Year's Resolution - keep my blog going and build it up.

2007-01-03T17:09:00.000-08:00

No sure why I did not keep my MFI blog going - but I think after the initial enthusiasm for MFI, I calmed myself down a little bit and stopped obsessing about the whole thing.

Overall - I am still on track with the MFI portfolio. Of course things change, but I am getting closer to my 1 year MFI anniversary and I will start selling my first "batch" of stocks - although some have already departed.

A little German saying ...

2006-08-23T10:06:00.000-07:00

There is a German saying "Kleinvieh macht auch Mist" -- the direct translation would be that "small animals also create dung". The more proper English saying would be that "Many pennies make a dollar" .

The "dung" in my MFI portfolio has been dividend payments. I just have not paid that much attention to it. But sure enough, after about 6 month of owning a number of stocks it has added up to "make a dollar" -- actually over $600.

Now this creates several problems for me:

- now I have to add these dividend payments into my returns for the MFI portfolio, which sounds easier said than done, because most portfolio trackers (I use Yahoo and Morningstar) are not exactly set up for this

- the next problem is what to do with the money (true - this is always a good problem to have) - but you can not really invest $28.75 at a time >> I will probably have to always wait until the next quarterly purchases and reinvest the money then.

- I don't know about other people, but why is it that I have paid quite a bit of attention and worry to the transaction cost of managing the MFI portfolio, but it takes me 6 month to start thinking about the dividends ??

Why did it have to be HR Block ?

2006-08-17T13:04:00.000-07:00

In my last round of buys, I picked up HRB -- HR Block . They have been on the MFI lists ever since I started this whole thing in the beginning of the year. I almost bought shares in Feb, but then 30 seconds of TV changed all of this.

It was before tax time and I saw an HR Block commercial --- they offered a scratchers game (same as you play in your local liquor store) for people that had them do their taxes.

That was a HUGE turnoff for me -- why ???

I view "Doing taxes" as a rather important financial transaction -- probably right up there with a quarterly review of your investments, maybe even more important than that. Why on earth would I want to go to a place that offered me a scratchers game to do my taxes ?? What's next -- go to a BINGO HALL and have your taxes done while playing Bingo ??

or

The new tax season is here -- go to Las Vegas and have the casino do your taxes.

It just does not make ANY sense to advertise like that so I was never going to buy HRB -- until my random August buys came up with HRB in the selection process and now I am stuck with them -- but I swear, if I see another commercial like this during tax season, I am dumping the shares no matter what...

AUGUST BUYS -- completing my $$ investment in MFI

2006-08-17T12:48:00.000-07:00

August represented my last round of investing part of my savings in MFI stocks. I may have to sell some of my February buys in November, because I would like to get towards a regular quarterly buying.

Again -- I used a different approach to buying / picking the stocks this time around. I was getting a little worried about having so many stocks in the portfolio that showed recent disasters -- meaning BIG one-time drops or 3 month downward trends dropping 30-50% in value.

So again, I waited until about 2/3 of the MFI top 50 list (100 mill cap) was updated for earnings and i kicked out stocks I already owned. That gave me 30-32 stocks. Now I went and checked their current price against the 50 day and 200 day moving average and I kicked out all the "disaster" stories (many were 30-50% off the averages). Of the remaining 15 bought 7 stocks at random.

ASPV
CRYP
IVAC
HRB
THO
GIB
VTRU

Not very happy about the VTRU and HRB being in the group. They have been lingering in the MFI listings for a long time now - and VTRU has at least done a little something, but I really have very little faith in HRB. (See my post about HR Block for more...)

Funny coincident about GIB -- I did not realize right away that this was CGI -- a tech consulting company out of Canada. My brotyher just got a job there in Germany -- now this is a REALLY big deal since people in Germany DO NOT switch jobs very often (I think this is the 2 company he has worked for in the last 15 years..). So, now I have somebody to blame if this stocks goes downhill...

MAY purchases for Magic Formula Investing -- random picks

2006-08-17T12:20:00.000-07:00

My May purchases are really different from the original puchases -- so I keeping them seperate for now, but I will combine them eventually.

This time around I wanted to go completly random using the MFI stocks. I wanted to get updated quarterly numbers so was waiting for the MFI list to show all the 3/30 quarterly upates. That actually takes quite a while, usually until about May 20 or later. Of course I was getting a little anxious, so I bought on May 17 --- It was a downday for the markets, so I thought the timing was good (it was followed by 2 or 3 more downdays, which would have saved me quite a bit of money -- but you never know this stuff).

This time around I wanted to pick at random -- which is easier said than done. I used 100 mill market cap and 50 stocks from the MFi website. I kicked out the one's that I had already bought and the one's that had not posted earnings (there was one stock on there with Sept. as the last earnings date).

- That gave me a 41 stocks
- I plugged them into Yahoo finance which now updates realtime
- At a random time I copied all the current stock prices into an excel sheet and then I bought the shares where the first digit after the comma was a 2 or a 4. So if the price was 12.86, I did not buy -- if the price was 44.28, I bought.
- Why use such a strange stock picker -- I really wanted to avoid cherry picking this time around. And even looking at the names of many of these stocks, I would always be influenced (also because I have been reading and watching a lot of MFI blogs / message boards and many of the same stocks are being talked about)
- The other advantage was that it provided a random number on how many stocks to purchase - in this case it as the following 9 stocks:

CALL
DEBS
GMR
GSTL
INTX
NADX
PTEN
TOPT
TGIS

I just went and bought an equal $ amount of each -- never even checking anything about these companies. That takes A LOT OF FAITH !!!!!!!!!!!!!!!!

How is this May portfolio doing so far --( benchmarks are measured from May 17) ???
May MFI: -4.25 %
SP500: +2.1 %
Russ2000: -2.75%

So this one is a little behind the Russel and quite a bit behind the SP500. I had 2 stocks that just dropped 20-25% within the first 10 days of purchase and i have been behind ever since.

TGIS is such a tease of a stock -- I bought it at 11.42 -- it has been as low as 9 and as high as 16 in the last 2 month alone -- right now it's at 10 or so.

I got 3 shipping stocks -- 2 of which are paying a VERY high divident yield. That will be difficult to track in terms of portfolio return -- their yield is over 10%.

BACK IN BUSINESS -- an UPDATE on FEB 06 buys

2006-08-17T12:10:00.000-07:00

Wow - I am not sure why I have not been updating my blog here. I think I was getting a little carried away with checking my portfolio (too often - see human nature post). So I wanted to get away from it all.

Here is a Numbers update --- because money talks ...:

I had bought 20 stocks in February -- and I still have 17 of them. I switched out a few for various reasons. I am hoping to be able to purchase 7-8 stocks every quarter, so I sold a few that I did not have much faith in -- I had one that was bought out for cash -- and I sold one (Portalplayer -- I will post another update just for that one). The net effect of the "non-standard" transactions (I call them non-standard because you are supposed to hold the stocks for one year) -- the effect was +- 0 -- so I am still able to track the original portfolio's return.

TODAY my February MFI is up 7% -- benchmarks >> SP500 is even and Russell 2000 is down 2% over the same time period. So overall VERY ENCOURAGING and I am very happy with the progress.

Human Nature

2006-04-04T13:49:00.000-07:00

One of the main reasons for using the Magic Formula for my investments was NOT to have to worry about the daily checking of prices and company news. I was hoping to buy my shares, glance maybe once a week at the portfolio totals, and then do my quarterly updates.

Where did I go wrong ? First thing in the morning is a look at my holdings -- I know the release date for all the earnings - I know that American Eagle is reporting sales figures tomorrow. I know the daily ups and downs of Portalplayer. I wrote an e-mail to PW Eagle's investor relations (another story in itself). I check this board every day. I can tell you the exact % my shares are up compared to every index out there.

Where did I go wrong ???

1 month Update -- + 3.05 %

2006-03-23T08:48:00.000-08:00

Well here are the hard numbers and then a few thoughts:

Bought 2/23/06

Swimmer Magic Formula Portfolio: + 3.04 %

Compare same time span:
Dow: + 2.02 %
SP500: + 1.16%
Nasd: + .71%

Best Mutual Fund Category (Domestic - Not specialty)
Small Growth: +1.54%

Best Comparison Mutual Fund Category is Small Blend:
My return would compare to top 5% of all funds in the category !

Overall the results are quite impressive - I know, 1 month means very little. But the portfolio has easily beaten pretty much all the common comparison numbers.

The most fascinating thing is that the stock I thought would do the best out of my 20 is down the most (14%). Portalplayer, on paper had the best potential to me, so good thing good thing I bought 19 others to make up for that disaster.

How to pick the Big Winners ?

2006-03-21T13:04:00.000-08:00

I invested in 20 stocks at the same time (which I later learned is not the way to start out according the book guidelines) - but you get a wide spectrum of gains and losses.

With a little less than one month in - my biggest loser is 10% down - and my biggest gainers has raced up 32%. Most of the picks are between +/- 5% (more on the plus side - which is always good to know).

How do you find these big winners - the stock that gained 32% PWEI - has been under $3 less than 1 year ago and under $7 less than 6 month ago.

In this case - Small company - sales growth leading to sudden earnings turnaround. Sounds simple, but you tell me how to find more of these ????

A Pirate Attack !!!!

2006-03-11T19:04:00.000-08:00

One of the stocks I had bought using the formula is PW Eagle. They do some sort of piping for houses and buildings. They have actually been the best performer over the last 2 weeks - up 14 %.

Just Friday they have been targeted by a Pirate. A very aggressive hedge fund / MA fund called Pirate Capital has bought 18% of the outstanding stocks. I usually invest in large companies - so nothing like this has ever happened to a company's stock that I own.

I was intrigued - and researched the Pirate. They are very interesting - you can find a lot about a fund like that through the very public SEC filings.
- Pirate targets smaller companies - 100 million to 1 billion market cap
-they buy 5 - 20% of the outstanding shares, sometimes working with other "raiders"
- then they pressure the hell out of the existing management - start nominating new board members and attempt to force actions that they think will enhance the stock price.
- Some of the recent targets have been WLT GY CNR -- I never heard of any of these companies either, but it is very informative to follow the actions of the management and the virtual attacks of Pirate Capital
- most of the share values have gone up quite a bit, but the history of the Pirate Fund is only about 1 1/2 years

I feel pretty good about the shares I bought using the Formula - I guess somebody else used their analysis and decided a company was very profitable and undervalued - they just have a Billion dollars to follow their ideas....

2 WEEKS IN

2006-03-09T13:23:00.000-08:00

I now get up every morning and check the portfolio - which has increased my stress level quite a bit (and I thought I would just be able to forget about the whole thing for one year - which is the idea of the formula).

RESULTS end of market today - 03/09/2006:

MAGIC PORTFOLIO: $51,045 UP 0.6% or $305 (from 50,740)

compare to indexes:

DOW JONES: 10972 -- DOWN 1.1% (from 11093) -- GAP to Magic = 1.7% (not bad)
SP 500: 1272 -- DOWN 1.4% (from 1290) -- GAP to Magic = 1.98%
NASDAQ: 2249 -- DOWN 1.63 % (from 2287) -- GAP to Magic = 2.2%

So far so good - I guess

Best stock is up 20% - my god - PW EAGLE announced good earnings. They make some sort of plastic pipes for the housing industry and they are a big turnaround from 1 year ago - 52 week low was 2.73 now at 24.5 -- where is the formula to find those companies ?????????

Worst performer is Portalplayer - PLAY
They are down 8% (was down 10% 2 days ago). They make the semiconductor for IPODs which is about 95% of their business. If you look at their key statistics - the value of the stock makes absolutely no sense. The are growing like crazy (more than 100% over the last year), and they are making very healthy profits -- P/E ratio is 10-12 // PEG ratio of .6 for crying out loud - they have beaten their estimates 5 straight quarters and they predict good growth coming - but the stock has been dropping from 33 to 23 (I bought at 25.9). They had an IPO 2 years ago and the insiders are cashing in options like crazy -- and then they announce a key partnership with Microsoft and a huge market opportunity for laptops they are looking to be the first one into - PLUS they are still the main supplier and will be in the future for Apple IPODs and NANOs.

They have a short ratio of almost 40% of the floating shares and their average daily volume is almost 10% of the float.

I actually dropped my cash reserve of $5000 and bought more shares -- 1 day later a big Japanese fund announced that they had accumulated 15% of the shares (I think they have been manipulating the share price to buy all these shares cheap) .

Go figure - and I know it was wrong to buy more shares - but that will not be part of my MAGIC portfolio - sometimes you just go for it....

THE BUYING

2006-03-09T13:09:00.000-08:00

I had 24 stock names - and $50,000 to invest - Plus a money market reserve of $5000 which I wanted to keep. I figured that I would start by buying about $2,000 - $2,500 per stock. I just started buying share multiples that would give me about a $2,500 value. Within 20 minutes I had 20 stocks - and I realized that for some reason I always rounded up just a little to get even numbers - so I was at about $50,700 in stocks. I moved a little more money into the account - (did not want to buy on margin) and I was done. The 4 stocks I did not buy were randomly left out. Here are the stocks and the buying price on Feb 23 or so (2 weeks ago):

Buying Price Total on FEB 23, 2006: $50,740 including transaction cost
ON SAME DAY:
DOW JONES - 11093
SP500 - 1290
NASDAQ - 2287

AEOS 25.79
CHKE 39.05
CSGS 22.14
EGY 6.42
ENDP 30.73
FCX 52.71
FTD 9.5
GBEL.OB 11.3
HAS 20.55
INSP 24.4
ITWO 15.92
KFY 20
KSWS 29.94
NTGR 17.01
PLAY 25.82
PWEI 20.34
SYNA 23.92
TBL 35.07
ULCM 11.04
UST 39.02

PICKING THE STOCKS

2006-03-09T12:41:00.000-08:00

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.

Magic Formula Investing / Little Book that Beats the Market

2006-03-09T11:54:00.000-08:00

Here is how it started. My financial situation was good, but really in chaos.

Accounts all over the place - 4 different 401 Ks / ROth IRA from former employers and things setup in the past and ignored for a while. 6 different bank accounts (personal and small business accounts), all that required balances (which I kept in order to avoid $10 charges - while not gettting any interest on really losing money - another topic for the future). My wife had US savings bonds from her grandpa in a drawer colecting dust and earning a 4% return.

So I wanted streamline -- I walked into the local Fidelity and moved all my retirement plans and brokerage accounts to Fidelty (about $100 K) -- once this is all there (it takes weeks before these other places send the money (another future topic) I am planning to pick some good mutual funds, continue to save, and watch the money grow. But all the bank accounts resulted in $55,000 in just cash (plus we had a good end of 2005 in our business) - which I wanted to invest in stocks myself. I bought 4 different magazines, 2 of which happened to have a write-up on the Little Book that Beats the Market.

I just decided to try it out for real -- why not -- I did not have a better system -- this seemed like a simple and workable plan and I just went for it - this was around Feb 22, 2006.

The Formula (this is from another article)
What is the magic formula? Invest in good companies when they are cheap. As Mr. Greenblatt might say: See? We told you it sounded obvious. Yeah, so what's "good"? And what's "cheap"?
Good companies earn high returns on their investments, he explains, while cheap companies sport share prices that are low (based on past earnings). His proxies for these criteria are return on capital (operating profit as a percentage of net working capital and net fixed assets) and earnings yield (pretax operating earnings compared with enterprise value, which is the market value plus the net debt). To make things simpler still, his free Web site, www.magicformulainvesting.com, screens companies using his criteria. He advises individual investors to buy a basket of top stocks and turn them over on a strict schedule, depending on how they perform. (For maximum tax advantage, sell losers just before a year's up, and winners just after a year.)
It sounds too easy. But in fact, his approach is difficult not because it is hard to understand, but because it requires patience and faith that you are right when the market is saying you're wrong.
This is based on Warren Buffett's investment principles. But they bear repeating. Even a die-hard value investor like Mr. Greenblatt says he didn't realize that trying to find cheap, good companies, rather than just cheap ones, was so important until the 1990s. While Mr. Graham, Mr. Buffett's mentor, was looking for starkly cheap companies, Mr. Buffett wants only the great ones.Greenblatt's backtesting shows that buying stocks that rank highest in a combination of earnings yield (the inverse of the price-to-earnings [P/E] ratio) and return on capital have doubled the market's returns, and his website shows what stocks pass the test right now.

The Work before:
I read everything there was out there about the book - but did not actually buy the book (that seems a little stupid - I know) . But it did not really seem worth it - the website http://www.magicformulainvesting.com/ really explains all you need to know.

Concerns I learned about:
- past performance does not translate into future success.... I understand that / hear that, but I really don't buy it. When you buy stocks you buy the business prospects for the respective products and the talents of the people who work there. I used to be an athlete - you don't rise to the very top by accident.
- transaction costs, that actually worked out ok for me -- with my account the first 100 trades are only $2.95, so if I but 30 stocks it is still less than $100 or less than .2% of the total (or.4% for a buy and sell).
- people just trashing the idea -- screw them
- the long-term commitment required -- I guess time will tell... that is really all I can say.
- Cherry picking the stocks -- looking at a list of 50 stocks and then using my own "filters" to pick and choose - something the author of the picks recommends against.

NEXT POST -- Put it in action