He didint tell us to sell winning bets. He told us to get rid of a losers. But I agree with you, sometimes we need more time for company to close the value gap. Sometimes several years.
My personal thoughts on why the magic formula has underperformed is because of this ridiculous bull market for the last 10 years. Magic formula investing is a play on value investing, and value investing has simply not returned the same value as growth stocks over the last 10 years. Possibly this is due to the influx of new day/swing traders, at rates that make the late 1990 seem insignificant. My guess is that results will pick up after a recession that takes away the desire for swing traders and growth stock
3 года назад+1
Yeah, I agree with most of what you said. Thanks for sharing your thoughts.
It beat the market last year by 18% and as the writer says it will fall short for certain years but over time beats the market.... also it's been an 11 year bull market where any for of value or fundamental investments fall short of the stupid hype stocks, this book will do well over the next decade while the market slows down
I built a portfolio using the magic formula on October 14th 2020 and I am pretty happy with the results so far. I will update this comment after one full year (if I remember).
3 года назад+4
That's awesome! Thanks for doing this Daniel. However, 1 year is not a very reliable period when it comes to assessing an investment strategy. In my view, you need to look at at least 5 years of performance if you want to draw any reliable conclusions. So maybe you can continue to do this every year :).
@@Matsoni85 it is very easy. You can go towww.magicformulainvesting.com/ to get your stock picks. But I suggest you read the Little Book that stills bear the market first.
3 года назад
@@Matsoni85 Well, the magic formula is basically a website that is free to use.
3 года назад+1
@*😎* Assessing business quality requires a lot of qualitative insight and judgment which is why you can hardly screen for it. High returns on capital for many years would be one way to screen for these firms but that's just one piece of the overall investment puzzle. I recommend reading the book 7 Powers by Hamilton Helmer.
That’s pretty much how I’ve been using the magic formula for the last few years. I use it to help find stocks, then I evaluate them myself. I also read through lists of low PE stocks, and just straight up search stock lists in alphabetical order sometimes. Very time consuming. The magic formula just gives me some stock ideas.
I bought 14 stocks relatively blindly based on the magic formula to gather some data of my own. I bought the first 7 on 10/13/20 and the second set on 11/6/2020. The first 7 were all companies that were also in the Smp 500 and the second set were smaller cap stocks. The first set are currently up 5% not bad for a normal year but this 2020ish and a share of voo I bought around the same time is up 15% The second set has preformed better up 48% so far. A large part of this is because 2 of the companies are alternative fuel companies, which have seen a massive run up post election. Obviously this this a very short period of time and should be taken with a massive grain salt.
So it means you don't have to strictly buy the 30 stocks the magic formula displays. Right? You only picked 14. On the second set did you run another screener or it was the same list?
The big problem is AAII's screener and database is quite different to the original Joel Greenblatt formula and database. AAII uses their own proprietary stock database called something like Stock Investor Pro. Joel Greenblatt used CRSP, I think. And, AAII has a different formulation of the formula. Unless AAII can run this screen back in that same time period and replicate the returns of the book, I would disregard it.
Great content and great editing too! I am very impressed, the key part of the magic formula I do not like is that you should strictly sell after 12 months, I like to plan my exit based on metrics other than time, namely if I consider the stock to still be a good investment, has something changed for example or do I expect the company to decline or change its pace of growth etc, time alone is not a reason to sell for me. Good luck with your channel René I am sure it will grow fast as the quality of your content is exceptional!
3 года назад+2
Hello Andy. Thanks so much for your kind words! And of course I agree 100% with what you said. Keep up the good work on your channel too.
This may have been an update after the release of the book, but I have seen multiple references to Greenblatt saying that, if a stock is still on the list after the year point has been reached, an investor should consider continuing to hold the stock for another year. That definitely doesn't completely address your stated concern, but I think it is a notable distinction.
The formula is for thoughtless rule based execution that someone with no interest in the companies can execute. On whole its the best time to sell based on general price/value mean reversion and tax implications. Should adapt to your own style, but interestingly enough, on whole when adapted people perform worse.
Phew... only just bought this book and I was afraid after seeing the title that I would've wasted my time and money 😂 I was actually planning to use this idea to look further into the fundamentals like you suggested 👍
3 года назад+3
It's a great book. It covers most of the fundamentals of investing.
I don't find what happened that strange. The author mentioned it does underperform during bull markets. I think that is what we have been in for most of the years since the book came out. Value investing is like that. To really make the big money from that style of investing you need a long time frame including bear markets. BTW it's my favourite type of investing.
Underperformed in frothy markets... "This time is different" mentality will be beaten in time. Stick to a process for value, don't be jealous of frothy times of over-exuberance...
Hey Rene, in your video you mentioned that 1-yr ROC isn't strong enough but rather we should ask can the company maintain strong ROC in the long term and the best filter for that is asking if the company has a strong MOAT. My question is, if every 12 months we run the magic formula again and keep companies that have maintained a strong ROC (a criticism you had against selling all holdings after one year which I agree) and then add new ones with stronger ROCs (selling off ones that fell off the list), wouldn't that negate the reason to identify MOAT because we are continuing to revise our portfolio along high ROC companies each year? Perhaps I don't understand soemthing but would appreciate your thoughts. Thank you
2 года назад+2
Personally, I only use the magic formula screen as a way to find new investment ideas. I want to find companies that I won't need to sell in one year, but can rather own for multiple years (ideally decades).
Fully agree with you. Having a quantitative aproach to your investments is a great way to stay calm and not become to emotional and fail due to our biasis, but you can not just simply blindly pick your stocks, because more often than not one simple look at the companys buisness and/or history, would reveal, that it had one or two good years followed by very medium to poor years.
Great channel Rene. I'm a new subscriber. Looking forward to watching your content.
Год назад+1
Thanks! Watching the Magic Formula video today is almost a bit cringe today. I'd like to think I could up the video quality a little ever since relating this video. Anyways, welcome on board!
New subscriber here too, my two pences on that thought : the content is good enough so that new comers still go back three years to watch it in full despite a "poor" recording quality (the mic gulping is quite irking me ^^') That means your content is great, I'll stick to going back through time but can't wait to catch up with the new material ! I am at video 3, and I already learnt new thinking pattern. I found what I was looking for, many thanks for your hard works over the years !
I think the year came out, it became more widely used, the formula became more widely known, and everyone essentially arbitrage this formula out of efficiency.
Год назад+2
That's how it usually goes with quantitative approach that work (in the short term).
The problem with this investing is major tax implications. The formula is based on constant turnover. Every successful stock investor ALL recommend long term holds not just 1-3 years!
Год назад+1
That#s a great point! I recently made a video on the topic of taxes and their impact on your returns: ruclips.net/video/cu75BqakEfQ/видео.html
Nice video, René. Some years ago I tried some value quant strategies (magic formula, TAM, Net Nets). I think the idea is interesting (I mean, buy a quality stock at a cheap price), but these kind of strategies (for me) are difficult to hold. It’s psicologically difficult to own companies you really don’t like. I prefer to think like a business owner and not like a statician.
3 года назад+2
"It’s psychologically difficult to own companies you really don’t like." --> That's a great point I have never really thought about. 100% on point.
Very interesting content, thank you. Besides all you said (which I agree with) I also have a problem with Greenblatt's way of using pre-tax (instead of after-tax) operating profit, i.e. EBIT instead of EBIT*(1-tax rate). I understand he wants to compare the merits of the companies irrespective of the taxes they pay. This shouldn't matter if all the companies operate in the same country (the US). However, I invest in Europe, and tax spreads within Europe is a reality. Considering two equally well-run companies A and B, A being French and B being Irish, B will reward the investor better than A does, that is a fact. So if I want to choose the company that will reward me best (as opposed to awarding medals to the managers), why shoudn't I take the tax rate into account (the result being choosing B instead of A)?
2 года назад+1
Fair point. To answer your question: The problem is that tax rates can change. I cannot say with a high degree of certainty that corporate tax rates will be the same in 10-20 years in whatever country.
I think this analysis would be different if you looked at investing into the magic formula outside of the US (equally as investing into value stock outside of the US) and maybe this could be a topic for a follow up video. =) Although just anecdotally, my investments over the past year (in Europe) have at least over-performed the index. Nontheles, I really appreciate your analysis. Keep it up René (from one small youtuber to another) =)
How do you do the magic formula outside the USA? Do you find these by going through the stocks one by one? The magic formula website I think just lists stocks from the USA.
I've seen all these mechanical formulas come and go (Dogs of the Dow etc)... They all work for a while until everyone starts using them, then the underperform and revert to the mean
My personal opinion is if you're just buying 20 or 30 stocks you're still just guessing. There's no way all 30 stocks perform equally and so the fact you can't just pick the even higher performers leaves to question does one need this big of a net?
You hit it on the head in this video 👏 adding a qualitative measure will greatly enhance your returns. Start with the MF list and for each company, as yourself, under current conditions, can this company sustain a good chunk of its profitability? Or was the profitability just a onetime spike? Doing this will greatly enhance your returns!
It’s good to look at 5 YR average ROA/ROIC and compare that to ROA/ROIC TTM (trailing twelve months). I’m surprised that the MF website has not made that change from 12 month ROIC to 5 YR ROIC. Another thing to look at is dilution and eliminate companies that are net diluting the public shareholders.
Well according to me, there is challenge on both value and quality side. For eg, In India, the stock prices follow earnings growth instead of earnings yield or roic. So if a company with high earnings yield earns the same eps for next 10 years it'll still remian a value stock.
Have other ideas for non performance of the formula. Would be glad to discuss them.
Год назад
Long-term, all stocks follow earnings growth. That is true for pretty much all stock markets around the world. The earnings yield is just one of many factors to consider.
The stock market is a para mutual system just like the race track.If you have a tout at the track who predicts winners consistently then many people will bet on his picks and drive down the. winnings.The fact that the magic formula quit working after the book was published gives it away..
Hi René, thank you. I used the magic formula and the 20 stocks I choose according to this formula returned 11% in November. But I add further filters. Happy New Year! All the best in 2021!
3 года назад
Thanks for your comment. I wish you all the best for 2021 as well!
There is nothing wrong with the screener. But the "HOW TO USE IT" was oversimplified. It should be used in conjunction with your preferred technical trading strategy. One can't just enter positions haphazardly and hope for the best. Either buy positions that already started an uptrend and get out when the trend changes, or buy oversold positions that are crashing and get out after the next bounce once you book a decent gain. Exiting with a 2% gain in 5 days for example is totally acceptable. It's not a good idea to buy anything at anytime, then hold it for a year and hope for the best. Irrespective of what screener the positions fell out of. Timing is always important, even with undervalued companies. Because sentiment wins out over fundamentals most of the time. Cut your losses short if the position turns against you and let the winners run till the trend changes. Why would anybody hold a position for a year and see it drop 50% or more in price is beyond me. 10% is a max loss on a position one should tolerate before getting the hell out of it. Nobody wins them all. Some losses are inevitable.
It is the problem in how you applying the magic formula, which sorting do you place more priority on, ROIC sorting or E/P sorting having larger priority?
6 месяцев назад+1
I just use it as an idea generation tool and then need to assess the ideas qualitatively, just going through them one by one.
@ ROIC:E/P are two parallel sorting, at the end, one has to decide how to assess to come up with final score, this is the uncertain part which has the greatest risk. Why don't you merge two separate ROIC and E/P into one single formula?
What do you think of Greenblatt's ROC definition, as opposed to ROCE / ROIC? Do you have a preference? One take I heard is that Greenblatt's ROC combined with FCF/sales is a good moat indicator.
Год назад+2
If I had to choose one return metric I'd go for ROIIC (return on incremental invested capital). I know that Greenblatt's formula is fairly complex and I'd have to calculate it myself (instead of relying on financial services websites). Hence, I don't use it. But of course, it's a useful metric too, but shouldn't make too big of a difference.
the first thing that I would ask is if those results shown in AAII are trustworthy or not?. Since your premise that the magic formula is failing is basically that you trust in the results portraited in that web site. Honestly, if they dont show me how they applied the concept of the magic formula in their computing systems, it is very hard for me to trust in those results. In my humble view, I only trust in the data provided by the "Little book that beats the market" even if it is outdated.
2 года назад+1
Fair point. I've seen similar stats though and it shouldn't be surprising that during a period of growth stock outperformance, "value stocks" on average performed rather poorly.
good afternoon, interesting video, only there are a few nuances. how correctly people interpret and use the magic formula and the site of the same name, and do not compose their custom portfolio assemblies only on the basis of this sample. For example, I did not take all the companies recommended on the site, the balance of the sample of companies in the portfolio among themselves was important for me, because some companies immediately dropped out of the sample because they did not fit at their high price. For example, you have 1000 $ and you need to invest it in a sample of companies numbering 20-30, 1000/20 = 50, i.e. the share of one company can no longer be more than $ 50. This is because everyone has their own criteria for the selection process according to the magic formula, and the criteria of different users are superimposed on Greenblatt's criteria. Therefore, the results of investing according to the magic formula can be different for different people at different periods of time.
3 года назад+1
Hello Aleksey. Thanks for taking the time to write such a long comment. Much appreciated. I agree with you for the most part. As I outline in the video, it makes sense to use the formula as a screening tool and to then do you due diligence to filter the list even further.
I don't feel magic formula has lost it's glare. Problem these days are inability to find very cheap STOCKS as we are in a long continued bull market for last 5-6 years continuously with a short dip at 2020.
Really enjoyed your video. Well thought out and you made several great points. I'm personally trying to decide if I want to use the Magic Formula/Acquirer's Multiple. Thank you.
3 года назад+1
I would use it as one of many tools to generate investment ideas that then require further research.
It's a good starting point. However, rather bad debt/assets and declining cash flow companies can sneak in there. Relative to a sector, bad debt/assets should generally be avoided and if the free cash flow is declining, then the formula is not calculating future income. Not good.
@ You too! I would be interested in a video where you elaborate on the idea of letting "winners run" that would otherwise be excluded from the portfolio after a year. I'm trying to see how you would discern a winner that fails the formula. I suppose something like an acquisition, special one-time expenses, a pandemic? I'm still learning. Thanks for the content!
3 года назад+2
@@phantomcreamer You might want to check out my video on the "Art of NOT selling". Let me know if this is what you were looking for. Kind regards Rene
Wow 😄the video I needed. When you get the list of stocks on his website. Do you have to pick exactly those stocks? or Can you run a the screener again to pick stocks according to the criteria you mentioned in this video?
Год назад+1
Buying stocks based on the results of a screener alone is a pretty bad idea in my opinion. It's only a starting point and then the real work begins.
I feel you are engaging in the gamblers fallacy/ sunk cost fallacy when you advise letting stocks run when you have held the for a year and not seen profit. The desire to fiddle with quantitative strategies outputs based on subjective qualitative metrics. generally takes away their greatest strengths and that is how they bypass human irrationality and fragile temperament. Happy investing.
3 года назад+1
You should absolutely watch my latest video (ruclips.net/video/urF0mZMtsEw/видео.html). Selling a stock just because you haven't seen a profit is a bad investing framework imo.
Great explanation. Magic formula is helping the people who do not have any idea on stock market. I thought you would suggest another formula or extensions by filling the gaps in magic formula. It would be helpful to laymen who do not know stock market. Could you please suggest a formula?
2 года назад+1
I've actually done a video recently in which I share another formula. Check out my channel - it should be among the last 10-15 videos.
I read the book, the Appendix he explain the formula he actually used. It's very different that the one he mention in the book. It was hard to find the right information in the income statement. If you could explain with real examples of stock how to calculate the real magic formula showed in the appendix, I would greatly appreciate. Why the formula does not work. I see 2 reasons: the market on some stocks are speculative, they see TSLA as the future, no matter the numbers, even the CEO say the business is almost bankrupt. But still people make alot of money with TSLA. The 2nd reason is that it focus on the past data, can't predict the future. I would add a 3th one, the stock pick does not use any technical analysis. But if you combine both, you could get a winner. Choosing good company, at bottom and sell at high. But just buying stock because they are the one the computer choosed and sell them in 1 year for just because it's what suggested make no sense to me. I think the maket is changing, because investors are changing. A younger generation that trade with commision free think differently.
the market will eventually crash. That will chase a lot of these newer, speculative investors. Value investing is not dead, as the author explains in the book you have to gauge over the long term. The current market has some similarities with the market just before the dot com bubble and the more recent financial crisis.
Personally, I think the magic formula is a bit misunderstood. I believe it is a statistical way of exploiting the return-to-mean effect. This matches up with Greenblatt's experience that people will have poorer performance if they start to manually pick from the stock screener, i.e. the best effect can come from a seemingly lower quality stock. This is also why it makes sense to not hold longer than 1 year, since you are just hunting the return-to-mean effect. Also, Greenblatt has been very clear on that the magic formula will have periods with poorer performance. If not, everyone would be doing this. However, if you are hunting the return-to-mean effect, I would think you want a lot of volatility. I believe the period after the book came out has had lower volatility, which might be the explanation of why it has not done as well as earlier.
Little slow phase of explaining things. Alteast you could have given the 1.5x thing. (I actually don't know if you have to enable it or an option by youtube.)
3 года назад
1.5x should be available actually. I listen to pretty much everything at 1.5x too nowadays - makes everything else seem slow :)
Question is if we look at full data does it still perform better or worse? Hovewer difference between investing in 20 and 500 stocks is much bigger volatility. You're much more likely to have bigger loses and wins than market. imagine if you picked just one stock 10 years ago let's say it was apple you would have huge return. Doesn't mean you beat the market you basically got lucky. So I will just stick to index funds. Everything else cannot be trusted.
3 года назад+2
I would not agree with you here. I agree that a lot of people will be better off by just investing in an index fund. However, if you know how to carefully choose high-quality business and know when they are able at a bargain price, you should do this. While there is some luck involved, the majority of your long-term performance as an active stock picker will be based on your analysis and behavior during downturns.
Hey, do you do backtests yourself? I know of some interesting and quite simple strategy I'd like you to backtest and show to results if possible. Maybe we could also tweak it a bit and make it more optimal. It allegedly made about 26% annually on average, while limiting some risk.
2 года назад+1
Hey Chen. I actually don't have the skills and tools to backtest. Sorry.
Can anyone point me towards something that will explain efficient ways to find/filter price momentum? I know what it is, I know how to calculate it, but for MF, calculating day to day or month to month price momentum for 30 stocks is tedious at best. Looking for a way to easily sift through the initial MF stocks via price momentum by lookback periods. Thanks all
Does anyone know how to see the historical companies chosen by the magic formula? (Not the just the most recent quarter on the website). It would be very helpful for my research.
I enjoyed the video. I started using the magic formula approach a few months ago, although I did dig into the companies a bit instead if just selecting randomly. Is there a particular site you’d recommend where I can find the buffett hagstrom stock screener, or a similar screener that would incorporate the qualitative metrics you talked about?
3 года назад+1
I haven't incorporated the Buffett Hagstrom screener in my process yet. So I guess, you'll have to do some research yourself. Let us know if you find a good tool. Just on a side note, I also believe that the best ideas don't screen well.
I hate when people say "All you have to do is open an investment account and then already be wealthy enough to put away $1000 a month forever and you'll be rich!" Yeah, if I had enough money to put away $1000 a month I wouldn't have any problems with money in the first place.
Very intersting video, thanks! I use the magicformula as a screening tool as well, but have only bought a couple companies based on it. I wonder how the magic formula would fare, if you add some very rudimentary extra screeners. Some companies on the list seem to be in dire financial conditions. Intuitively I would think that if you exclude those companies, the formula would become more effective, because you can't buy the biggest losers? Or do you think that the reverse is true, and that those companies are actually the ones with the biggest upside?
3 года назад+1
No, I would agree with you and think that assumption is correct.
Greenblatt disclosed that he did rolling periods, not calendar years. He also stated that it would not work for years on end, sometimes. He also stated that an investor should do some research into the companies and he said to hold fewer stocks, not 50. I read the little book that "still" beats the market, so perhaps it was expanded upon more in that version of the book. It is a screening model more than a quantitative model. If someone were to buy married puts for those investments, it would have slayed the returns of the overall market.
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What do you think about the magic formula investing approach? Have you used this strategy? Do you use it to screen for ideas?
He didint tell us to sell winning bets. He told us to get rid of a losers. But I agree with you, sometimes we need more time for company to close the value gap. Sometimes several years.
My variation of Magic Formula, is MF stock in the state rebouding positive 6m Index Price, with positive outlook, growing sales and earnings.
@@maciejpopawski3025 is it working for you
52% last year
instablaster...
My personal thoughts on why the magic formula has underperformed is because of this ridiculous bull market for the last 10 years. Magic formula investing is a play on value investing, and value investing has simply not returned the same value as growth stocks over the last 10 years. Possibly this is due to the influx of new day/swing traders, at rates that make the late 1990 seem insignificant. My guess is that results will pick up after a recession that takes away the desire for swing traders and growth stock
Yeah, I agree with most of what you said. Thanks for sharing your thoughts.
what you said looks like is about to come true!
Day traders = HFT firms
It beat the market last year by 18% and as the writer says it will fall short for certain years but over time beats the market.... also it's been an 11 year bull market where any for of value or fundamental investments fall short of the stupid hype stocks, this book will do well over the next decade while the market slows down
Is the performance of this method tracked anywhere still?
I have NOT been disappointed by my magic formula results over the last 12 months
Hi Brad. It's hard to do poorly in anything over the last 12 months though, right?
@ fair 😎
Brad all your, videos are great !
I built a portfolio using the magic formula on October 14th 2020 and I am pretty happy with the results so far. I will update this comment after one full year (if I remember).
That's awesome! Thanks for doing this Daniel. However, 1 year is not a very reliable period when it comes to assessing an investment strategy. In my view, you need to look at at least 5 years of performance if you want to draw any reliable conclusions. So maybe you can continue to do this every year :).
Is the formula hard to make? I like stocks, but dont know how to use excel. If you say its not that hard i will give it a go : )
@@Matsoni85 it is very easy. You can go towww.magicformulainvesting.com/ to get your stock picks. But I suggest you read the Little Book that stills bear the market first.
@@Matsoni85 Well, the magic formula is basically a website that is free to use.
@*😎* Assessing business quality requires a lot of qualitative insight and judgment which is why you can hardly screen for it. High returns on capital for many years would be one way to screen for these firms but that's just one piece of the overall investment puzzle.
I recommend reading the book 7 Powers by Hamilton Helmer.
That’s pretty much how I’ve been using the magic formula for the last few years. I use it to help find stocks, then I evaluate them myself. I also read through lists of low PE stocks, and just straight up search stock lists in alphabetical order sometimes. Very time consuming. The magic formula just gives me some stock ideas.
Sounds great
I bought 14 stocks relatively blindly based on the magic formula to gather some data of my own. I bought the first 7 on 10/13/20 and the second set on 11/6/2020. The first 7 were all companies that were also in the Smp 500 and the second set were smaller cap stocks.
The first set are currently up 5% not bad for a normal year but this 2020ish and a share of voo I bought around the same time is up 15%
The second set has preformed better up 48% so far. A large part of this is because 2 of the companies are alternative fuel companies, which have seen a massive run up post election.
Obviously this this a very short period of time and should be taken with a massive grain salt.
Thanks for sharing your experience Chris!
So it means you don't have to strictly buy the 30 stocks the magic formula displays. Right? You only picked 14. On the second set did you run another screener or it was the same list?
The big problem is AAII's screener and database is quite different to the original Joel Greenblatt formula and database. AAII uses their own proprietary stock database called something like Stock Investor Pro. Joel Greenblatt used CRSP, I think. And, AAII has a different formulation of the formula. Unless AAII can run this screen back in that same time period and replicate the returns of the book, I would disregard it.
Thanks for pointing this out
That is actually very fascinating
Great content and great editing too! I am very impressed, the key part of the magic formula I do not like is that you should strictly sell after 12 months, I like to plan my exit based on metrics other than time, namely if I consider the stock to still be a good investment, has something changed for example or do I expect the company to decline or change its pace of growth etc, time alone is not a reason to sell for me. Good luck with your channel René I am sure it will grow fast as the quality of your content is exceptional!
Hello Andy. Thanks so much for your kind words! And of course I agree 100% with what you said. Keep up the good work on your channel too.
This may have been an update after the release of the book, but I have seen multiple references to Greenblatt saying that, if a stock is still on the list after the year point has been reached, an investor should consider continuing to hold the stock for another year.
That definitely doesn't completely address your stated concern, but I think it is a notable distinction.
The formula is for thoughtless rule based execution that someone with no interest in the companies can execute. On whole its the best time to sell based on general price/value mean reversion and tax implications. Should adapt to your own style, but interestingly enough, on whole when adapted people perform worse.
Why would we sell our winners after 1 year
Phew... only just bought this book and I was afraid after seeing the title that I would've wasted my time and money 😂 I was actually planning to use this idea to look further into the fundamentals like you suggested 👍
It's a great book. It covers most of the fundamentals of investing.
I don't find what happened that strange. The author mentioned it does underperform during bull markets. I think that is what we have been in for most of the years since the book came out. Value investing is like that. To really make the big money from that style of investing you need a long time frame including bear markets. BTW it's my favourite type of investing.
Underperformed in frothy markets... "This time is different" mentality will be beaten in time. Stick to a process for value, don't be jealous of frothy times of over-exuberance...
If the stock shows back up in the formula after the year you keep it and don’t sell it. You only sell the ones that don’t show back up on the screener
Are you using this method? If so how's it doing?
Hey Rene, in your video you mentioned that 1-yr ROC isn't strong enough but rather we should ask can the company maintain strong ROC in the long term and the best filter for that is asking if the company has a strong MOAT.
My question is, if every 12 months we run the magic formula again and keep companies that have maintained a strong ROC (a criticism you had against selling all holdings after one year which I agree) and then add new ones with stronger ROCs (selling off ones that fell off the list), wouldn't that negate the reason to identify MOAT because we are continuing to revise our portfolio along high ROC companies each year? Perhaps I don't understand soemthing but would appreciate your thoughts.
Thank you
Personally, I only use the magic formula screen as a way to find new investment ideas. I want to find companies that I won't need to sell in one year, but can rather own for multiple years (ideally decades).
6%? Strong doubt in such a bull market. What are the exact parameters? (how many companies? what market caps? who said 6%?)
Fully agree with you. Having a quantitative aproach to your investments is a great way to stay calm and not become to emotional and fail due to our biasis, but you can not just simply blindly pick your stocks, because more often than not one simple look at the companys buisness and/or history, would reveal, that it had one or two good years followed by very medium to poor years.
Well said!
Great channel Rene. I'm a new subscriber. Looking forward to watching your content.
Thanks! Watching the Magic Formula video today is almost a bit cringe today. I'd like to think I could up the video quality a little ever since relating this video.
Anyways, welcome on board!
New subscriber here too, my two pences on that thought : the content is good enough so that new comers still go back three years to watch it in full despite a "poor" recording quality (the mic gulping is quite irking me ^^')
That means your content is great, I'll stick to going back through time but can't wait to catch up with the new material !
I am at video 3, and I already learnt new thinking pattern. I found what I was looking for, many thanks for your hard works over the years !
I think the year came out, it became more widely used, the formula became more widely known, and everyone essentially arbitrage this formula out of efficiency.
That's how it usually goes with quantitative approach that work (in the short term).
The problem with this investing is major tax implications. The formula is based on constant turnover. Every successful stock investor ALL recommend long term holds not just 1-3 years!
That#s a great point! I recently made a video on the topic of taxes and their impact on your returns:
ruclips.net/video/cu75BqakEfQ/видео.html
Nice video, René. Some years ago I tried some value quant strategies (magic formula, TAM, Net Nets). I think the idea is interesting (I mean, buy a quality stock at a cheap price), but these kind of strategies (for me) are difficult to hold. It’s psicologically difficult to own companies you really don’t like. I prefer to think like a business owner and not like a statician.
"It’s psychologically difficult to own companies you really don’t like." --> That's a great point I have never really thought about. 100% on point.
@ I experienced that kind of investments and it's very uncomfortable :)
Very interesting content, thank you. Besides all you said (which I agree with) I also have a problem with Greenblatt's way of using pre-tax (instead of after-tax) operating profit, i.e. EBIT instead of EBIT*(1-tax rate). I understand he wants to compare the merits of the companies irrespective of the taxes they pay. This shouldn't matter if all the companies operate in the same country (the US). However, I invest in Europe, and tax spreads within Europe is a reality. Considering two equally well-run companies A and B, A being French and B being Irish, B will reward the investor better than A does, that is a fact. So if I want to choose the company that will reward me best (as opposed to awarding medals to the managers), why shoudn't I take the tax rate into account (the result being choosing B instead of A)?
Fair point.
To answer your question: The problem is that tax rates can change. I cannot say with a high degree of certainty that corporate tax rates will be the same in 10-20 years in whatever country.
companies have very little control over the taxes
I think this analysis would be different if you looked at investing into the magic formula outside of the US (equally as investing into value stock outside of the US) and maybe this could be a topic for a follow up video. =) Although just anecdotally, my investments over the past year (in Europe) have at least over-performed the index. Nontheles, I really appreciate your analysis. Keep it up René (from one small youtuber to another) =)
Good point!
How do you do the magic formula outside the USA? Do you find these by going through the stocks one by one? The magic formula website I think just lists stocks from the USA.
The author states it doesn’t work for foreign stocks. States in the book several times.
I've seen all these mechanical formulas come and go (Dogs of the Dow etc)... They all work for a while until everyone starts using them, then the underperform and revert to the mean
My personal opinion is if you're just buying 20 or 30 stocks you're still just guessing. There's no way all 30 stocks perform equally and so the fact you can't just pick the even higher performers leaves to question does one need this big of a net?
You hit it on the head in this video 👏 adding a qualitative measure will greatly enhance your returns. Start with the MF list and for each company, as yourself, under current conditions, can this company sustain a good chunk of its profitability? Or was the profitability just a onetime spike? Doing this will greatly enhance your returns!
Absolutely!!
It’s good to look at 5 YR average ROA/ROIC and compare that to ROA/ROIC TTM (trailing twelve months). I’m surprised that the MF website has not made that change from 12 month ROIC to 5 YR ROIC.
Another thing to look at is dilution and eliminate companies that are net diluting the public shareholders.
What websites can I use to find lists of companies based on 5 year trends?
Well according to me, there is challenge on both value and quality side. For eg, In India, the stock prices follow earnings growth instead of earnings yield or roic. So if a company with high earnings yield earns the same eps for next 10 years it'll still remian a value stock.
Have other ideas for non performance of the formula. Would be glad to discuss them.
Long-term, all stocks follow earnings growth. That is true for pretty much all stock markets around the world. The earnings yield is just one of many factors to consider.
The stock market is a para mutual system just like the race track.If you have a tout at the track who predicts winners consistently then many people will bet on his picks and drive down the. winnings.The fact that the magic formula quit working after the book was published gives it away..
Hi René, thank you. I used the magic formula and the 20 stocks I choose according to this formula returned 11% in November. But I add further filters. Happy New Year! All the best in 2021!
Thanks for your comment. I wish you all the best for 2021 as well!
@ Thank you René :-)
There is nothing wrong with the screener. But the "HOW TO USE IT" was oversimplified. It should be used in conjunction with your preferred technical trading strategy. One can't just enter positions haphazardly and hope for the best. Either buy positions that already started an uptrend and get out when the trend changes, or buy oversold positions that are crashing and get out after the next bounce once you book a decent gain. Exiting with a 2% gain in 5 days for example is totally acceptable. It's not a good idea to buy anything at anytime, then hold it for a year and hope for the best. Irrespective of what screener the positions fell out of. Timing is always important, even with undervalued companies. Because sentiment wins out over fundamentals most of the time. Cut your losses short if the position turns against you and let the winners run till the trend changes. Why would anybody hold a position for a year and see it drop 50% or more in price is beyond me. 10% is a max loss on a position one should tolerate before getting the hell out of it. Nobody wins them all. Some losses are inevitable.
It is the problem in how you applying the magic formula, which sorting do you place more priority on, ROIC sorting or E/P sorting having larger priority?
I just use it as an idea generation tool and then need to assess the ideas qualitatively, just going through them one by one.
@
ROIC:E/P are two parallel sorting, at the end, one has to decide how to assess to come up with final score, this is the uncertain part which has the greatest risk.
Why don't you merge two separate ROIC and E/P into one single formula?
What do you think of Greenblatt's ROC definition, as opposed to ROCE / ROIC? Do you have a preference? One take I heard is that Greenblatt's ROC combined with FCF/sales is a good moat indicator.
If I had to choose one return metric I'd go for ROIIC (return on incremental invested capital). I know that Greenblatt's formula is fairly complex and I'd have to calculate it myself (instead of relying on financial services websites). Hence, I don't use it. But of course, it's a useful metric too, but shouldn't make too big of a difference.
@ Great, thanks!
I think it's because of the formula picks stocks vulnerable to macroeconomics. The global environment is different than it was in the 1970s-1980s
Can you elaborate on this?
Awesome video! Thanks for putting in some good production and great content!
Yeah, I am really trying to keep the quality of my videos high. So I am obviously glad you enjoyed it!
the first thing that I would ask is if those results shown in AAII are trustworthy or not?. Since your premise that the magic formula is failing is basically that you trust in the results portraited in that web site. Honestly, if they dont show me how they applied the concept of the magic formula in their computing systems, it is very hard for me to trust in those results. In my humble view, I only trust in the data provided by the "Little book that beats the market" even if it is outdated.
Fair point. I've seen similar stats though and it shouldn't be surprising that during a period of growth stock outperformance, "value stocks" on average performed rather poorly.
AAII uses different calculations than the one greenblatt uses in the book
good afternoon, interesting video, only there are a few nuances. how correctly people interpret and use the magic formula and the site of the same name, and do not compose their custom portfolio assemblies only on the basis of this sample. For example, I did not take all the companies recommended on the site, the balance of the sample of companies in the portfolio among themselves was important for me, because some companies immediately dropped out of the sample because they did not fit at their high price. For example, you have 1000 $ and you need to invest it in a sample of companies numbering 20-30, 1000/20 = 50, i.e. the share of one company can no longer be more than $ 50. This is because everyone has their own criteria for the selection process according to the magic formula, and the criteria of different users are superimposed on Greenblatt's criteria. Therefore, the results of investing according to the magic formula can be different for different people at different periods of time.
Hello Aleksey. Thanks for taking the time to write such a long comment. Much appreciated. I agree with you for the most part. As I outline in the video, it makes sense to use the formula as a screening tool and to then do you due diligence to filter the list even further.
I don't feel magic formula has lost it's glare.
Problem these days are inability to find very cheap STOCKS as we are in a long continued bull market for last 5-6 years continuously with a short dip at 2020.
Really enjoyed your video. Well thought out and you made several great points. I'm personally trying to decide if I want to use the Magic Formula/Acquirer's Multiple. Thank you.
I would use it as one of many tools to generate investment ideas that then require further research.
It's a good starting point. However, rather bad debt/assets and declining cash flow companies can sneak in there. Relative to a sector, bad debt/assets should generally be avoided and if the free cash flow is declining, then the formula is not calculating future income. Not good.
You're on point!
@ You too! I would be interested in a video where you elaborate on the idea of letting "winners run" that would otherwise be excluded from the portfolio after a year. I'm trying to see how you would discern a winner that fails the formula. I suppose something like an acquisition, special one-time expenses, a pandemic? I'm still learning.
Thanks for the content!
@@phantomcreamer You might want to check out my video on the "Art of NOT selling". Let me know if this is what you were looking for. Kind regards Rene
@ will do
Wow 😄the video I needed. When you get the list of stocks on his website. Do you have to pick exactly those stocks? or Can you run a the screener again to pick stocks according to the criteria you mentioned in this video?
Buying stocks based on the results of a screener alone is a pretty bad idea in my opinion. It's only a starting point and then the real work begins.
I feel you are engaging in the gamblers fallacy/ sunk cost fallacy when you advise letting stocks run when you have held the for a year and not seen profit.
The desire to fiddle with quantitative strategies outputs based on subjective qualitative metrics. generally takes away their greatest strengths and that is how they bypass human irrationality and fragile temperament.
Happy investing.
You should absolutely watch my latest video (ruclips.net/video/urF0mZMtsEw/видео.html). Selling a stock just because you haven't seen a profit is a bad investing framework imo.
@ will do
Great explanation. Magic formula is helping the people who do not have any idea on stock market. I thought you would suggest another formula or extensions by filling the gaps in magic formula. It would be helpful to laymen who do not know stock market. Could you please suggest a formula?
I've actually done a video recently in which I share another formula. Check out my channel - it should be among the last 10-15 videos.
Sure, thank you for swift reply :-)
I read the book, the Appendix he explain the formula he actually used. It's very different that the one he mention in the book. It was hard to find the right information in the income statement. If you could explain with real examples of stock how to calculate the real magic formula showed in the appendix, I would greatly appreciate.
Why the formula does not work. I see 2 reasons: the market on some stocks are speculative, they see TSLA as the future, no matter the numbers, even the CEO say the business is almost bankrupt. But still people make alot of money with TSLA. The 2nd reason is that it focus on the past data, can't predict the future. I would add a 3th one, the stock pick does not use any technical analysis. But if you combine both, you could get a winner. Choosing good company, at bottom and sell at high. But just buying stock because they are the one the computer choosed and sell them in 1 year for just because it's what suggested make no sense to me. I think the maket is changing, because investors are changing. A younger generation that trade with commision free think differently.
the market will eventually crash. That will chase a lot of these newer, speculative investors. Value investing is not dead, as the author explains in the book you have to gauge over the long term. The current market has some similarities with the market just before the dot com bubble and the more recent financial crisis.
Personally, I think the magic formula is a bit misunderstood. I believe it is a statistical way of exploiting the return-to-mean effect. This matches up with Greenblatt's experience that people will have poorer performance if they start to manually pick from the stock screener, i.e. the best effect can come from a seemingly lower quality stock. This is also why it makes sense to not hold longer than 1 year, since you are just hunting the return-to-mean effect. Also, Greenblatt has been very clear on that the magic formula will have periods with poorer performance. If not, everyone would be doing this. However, if you are hunting the return-to-mean effect, I would think you want a lot of volatility. I believe the period after the book came out has had lower volatility, which might be the explanation of why it has not done as well as earlier.
This is a great and well balanced view. Thanks!
Thanks for your comment Marijn
Great content, as usual!
Much appreciated!
Little slow phase of explaining things. Alteast you could have given the 1.5x thing. (I actually don't know if you have to enable it or an option by youtube.)
1.5x should be available actually. I listen to pretty much everything at 1.5x too nowadays - makes everything else seem slow :)
By the way geat content. Keep up the good work.
Wow this guy is SMART.
I just love the topic. I probably only have average intelligence ;-). Appreciate the kind words though.
Thanks
Greenblatt did say that the magic formula didn't always work.
True.
Why financial institutes are excluded in magic formula?
Great job 🙌
Hi Richard. Love to hear that. Thanks for your comment.
Question is if we look at full data does it still perform better or worse? Hovewer difference between investing in 20 and 500 stocks is much bigger volatility. You're much more likely to have bigger loses and wins than market. imagine if you picked just one stock 10 years ago let's say it was apple you would have huge return. Doesn't mean you beat the market you basically got lucky. So I will just stick to index funds. Everything else cannot be trusted.
I would not agree with you here. I agree that a lot of people will be better off by just investing in an index fund. However, if you know how to carefully choose high-quality business and know when they are able at a bargain price, you should do this. While there is some luck involved, the majority of your long-term performance as an active stock picker will be based on your analysis and behavior during downturns.
Where can I find the Buffet-Hagstorm screener?
Did you try googling it? ;-) That's what I'd do now.
Hey, do you do backtests yourself? I know of some interesting and quite simple strategy I'd like you to backtest and show to results if possible.
Maybe we could also tweak it a bit and make it more optimal.
It allegedly made about 26% annually on average, while limiting some risk.
Hey Chen. I actually don't have the skills and tools to backtest. Sorry.
@
Oh, ok thanks.
Can anyone point me towards something that will explain efficient ways to find/filter price momentum? I know what it is, I know how to calculate it, but for MF, calculating day to day or month to month price momentum for 30 stocks is tedious at best. Looking for a way to easily sift through the initial MF stocks via price momentum by lookback periods. Thanks all
Does the American association of individual investors results from tracking the screen include dividends?
Hi Lance. It's been a while since I did this video. I honestly don't know, but I'd assume they do. Let us know if you find anything.
Magic formula site does NOT rank companies as advocated by Green--- RANKING is the magic word and action
Can you share the website you used around 16:16 showing the key statistics? Thanks!
This was an amazing video 🤯
Thank you Ben
Great explication. Thank you.
You are welcome!
Cool video, nice explanations.
Glad you liked it!
Better to copy his portfolio then his formula:))
Great value!!!!
Thanks Hugo.
i think its been cycles and the sectors
Does anyone know how to see the historical companies chosen by the magic formula? (Not the just the most recent quarter on the website). It would be very helpful for my research.
hi, you need a screener (ex: Guru Focus, or TIKR, or Trading View..)
I enjoyed the video. I started using the magic formula approach a few months ago, although I did dig into the companies a bit instead if just selecting randomly.
Is there a particular site you’d recommend where I can find the buffett hagstrom stock screener, or a similar screener that would incorporate the qualitative metrics you talked about?
I haven't incorporated the Buffett Hagstrom screener in my process yet. So I guess, you'll have to do some research yourself. Let us know if you find a good tool.
Just on a side note, I also believe that the best ideas don't screen well.
very interesting topic
2005-2020 is a too short timeframe, literally had Covid and 2008 crisis in it.
16:14 Interesting video! What is the of this website 16:14 ?
Not used
I hate when people say "All you have to do is open an investment account and then already be wealthy enough to put away $1000 a month forever and you'll be rich!" Yeah, if I had enough money to put away $1000 a month I wouldn't have any problems with money in the first place.
Very intersting video, thanks!
I use the magicformula as a screening tool as well, but have only bought a couple companies based on it. I wonder how the magic formula would fare, if you add some very rudimentary extra screeners. Some companies on the list seem to be in dire financial conditions. Intuitively I would think that if you exclude those companies, the formula would become more effective, because you can't buy the biggest losers? Or do you think that the reverse is true, and that those companies are actually the ones with the biggest upside?
No, I would agree with you and think that assumption is correct.
Loved the content, but I would suggest to try to be more enthusiastic in your speech... Subbed!
Noted!
Greenblatt disclosed that he did rolling periods, not calendar years. He also stated that it would not work for years on end, sometimes. He also stated that an investor should do some research into the companies and he said to hold fewer stocks, not 50. I read the little book that "still" beats the market, so perhaps it was expanded upon more in that version of the book. It is a screening model more than a quantitative model. If someone were to buy married puts for those investments, it would have slayed the returns of the overall market.
Why should it be easy to get rich?Charlie Munger
Great quote!