I'm DONE with the Magic Formula! | Doing THIS Instead
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- Опубликовано: 30 мар 2022
- After nearly 2 years of implementing a modified magic formula investing strategy, I'm hanging up my hat. In this video I reveal my returns using magic formula versus investing in the S&P 500, and what I'll be doing instead.
To all you magic formula devotees, I wish you the best of luck!
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I assume this is an April fool's joke 🤣
It takes 3 years minimum to see if this strategy really works. Also comparing value investing to the best year ever for s&p 500 index, isn't a valid comparison as in the long run value investing always wins. Love your channel. Keep up the good work. Freedom is the goal!
He didn’t compare value investing to
The best year of S&P he compared
2010
To
Present
It
Definitely wasn’t April fools joke
There was zero
Humour implied
When I read the little book that beats the market I was disappointed in hearing about all the turn over. "Super Investor's Coffee Can" sounds like the way to go. 👍🏼
Now we're talkin
Seems like every RUclipsr (except Everything Money) is first trying to improve the magic formula and then quits. I think it shows how hard it is to stick to the rules, and why the formula still works.
Exactly
Talk about your crazy turn of events! We had a baby almost 3 months ago and I haven’t kept with your channel since. I am grateful for the work you put in to this channel and I am huge fan of both Pabrai and Greenblat.
I remember finding your channel from your first magic formula video. I was reading the book at the time. As always appreciate the content. It’s been fun following your magic formula journey.
Thank you my friend, we had a good run!
Thanks Brad, Nice hat, thanks for the update, i was wondering about your thoughts in magic formulae, I think in the future screen if you can add high roic for last 5 years that might be a good one to have in the screen. would be happy to see how you evolve to the next stage.
Brad, gotta give us more hat...more hat guy...super cool 😎 The pivit makes perfect sense...I much prefer the coffee can method over a strickly mechanical method that forces a sell at a certain time regardless of business fundamentals.
Great minds think alike Tim, and even my mind agrees ;)
I have a suggestion. Why not form buckets for different strategies rather than restricting the whole portfolio to a single strategy? For example, how about deciding on three strategies that we understood well, like magic formula, coffee can bets, and index? Spilt the portfolio into these buckets and follow a systematic approach for each of these. We cannot assume that a single approach will be superior to all other approaches. I think it's a big risk to commit to a single approach. Multiple approaches may be a safer way for mere mortals like us.
Thank you for openness.
Always my guy
I was a quant too. I still love and trust the style, but now I look for high quality compounders (it's psicologically the best thing to do in markets). Thanks Brad for sharing!
Hello. Are both after tax returns?….so they are comparable?
Great video. I'm not really a fan of risk adjusted returns because in my opinion volatility isn't risk and I've also only ever heard it used when you fail to beat the index.
Howard Marks gives a proper treatment of risk-adjusted return in The Most Important Thing 🎯
I agree that volatility is a poor proxy for risk
Hi Brad, How does the magic formula stock return over the last few years compare to your Pabrai clone stocks return?
MU +125%
SRG +28%
EAF -40%
Cool hat, you should keep it on in your videos. With regard to investing I went through a similar evolution and I now prefer the coffee can style as well .
The little crypto that beats the acquirer's multiple HEX 👌
Thanks for sharing your thoughts as well as doing this ‘experiment’ with the magic formula. It was educational.
I think you are on your right track with developing your own Brad’s Formula
Please do videos on it (hat or no hat)
Good luck with the move. What made the decision to move? Surprised you didn’t go to Austin with Pabrai LOL
The core process of Joel’s approach is ignored. He doesn’t specifically suggest turning over your holdings in one year intervals, rather assessing within yearly intervals. Those same companies may still hold proportional earnings yield:return on capital relative to your set market cap and thus could potentially remain in your basket. His mention of year to year analysis is merely for taxation purposes on capital gains or losses. Repeatedly throughout the book he references periods of down/slow growth. Yet, holding to the process for over 3-5 years begins to turn the tide in your favor. He further provides an example of a sample of investors where the process was “modified” over the same interval. The investor with the highest returns was questioned how he accomplished the returns. His response, “I followed the rules.”
I just read the book. The step by step recommends selling winners and losers yearly.
@@Beck-Stein you can sell winners yearly but are not bound to that rule (this is clarified by Joel) If the company still lands on the list within your market cap, then it can be kept. Another consideration to review is his explanation of market cap vs anticipated returns within each decibel
It’s incredibly useful to know about things like the Magic Formula and The Acquirers Multiple, but I also realized that I don’t have faith in a blind numerical method, particularly one with turnover rules. I prefer endless research into the companies with what I view as the strongest moats and growth opportunities. The format he changed to (modified-weighted index funds) is even further from my style, so the only Greenblatt I like is Stock Market Genius style investing).
Yeah but who can do that? That book was basically written for 90s hedge fund managers. If I need to be a genius on stub stocks, I'll hit that book again.
Glad you mentioned Joel said the SNP would return single digits the next two years which spooked me. Have you read you can be a stock market genius and what did you think? Also the hat fits into the coffee can portfolio being akin to old Westerns. Have you checked out Bill Akman's portfolio? Love the hat
Haha, thanks Chris. Yeah Bill Ackman is one of the 13Fs I keep an eye on each quarter. You Can Be a Stock Market Genius was a bit beyond me when I read it a few years ago. Perhaps with the new strategy I'll give the channel a Western makeover
Lots of things concerning with what you said, the main thing being: "my modified Magic Formula portfolio."
Great video Brad, the three stool approach from Ackre will be good mate!
Yeah I really resonate with that
love the stochastic process. keep the hat.
That hat f**kin rocks! Thanks again brad!
I think you need to be interested and engaged to stay in the market, whichever strategy you pick. Dividend investors, if it keeps you in the market, then it's a good strategy. All pops to you for sticking to your guns
I like picking stocks and owning company "free cash flow". Keeps me interested. So it's a good strategy for me
I like that perspective 🍻
I did the Magic formula from 2010-2014 I am glad I pivoted to Brk.b. Perhaps it will start working again if rates regress to the historical means. On the other hand I am curious how people still seems to trust Joel a lot as a value investor after he seems to have converted himself into a “closet indexor” an seams to make a lot of money out of fix management fees.
Thanks for the great video. I've been contemplating setting aside a chunk of money for the Magic Formula, but to be honest it seemed like a lot of turn for my liking. If you're looking for a possible metric, and you want to keep the count low, Buffett's test of $1 in retained earnings bringing in at least $1 in market value may be a good one. And testing this over a long-term period (like maybe 10 years). You can either do a straight comparison of marginal retained earnings to marginal market cap. But another cool way is to compare marginal retained earnings to the marginal increase in EPS, then apply a "reasonable" PE multiple to get a proxy "intrinsic" marginal market value added. And some prefer to use EBT per share instead of EPS. Best of luck setting up the new account strategy! Hat = Good.
Sounds like a smart metric, thanks for the suggestion! The hat may have to make a repeat appearance ;)
Hi @Value Thought Investing, could you please elaborate more or point out where I could understand better what the marginal retained earnings are? Never heard about that term and that calculation made by Buffet. Thanks!
@@DavidMM255 I may have to do some searching as to which Buffett letter it came from. But I'll try a summary here too. Say the company earned $100 in the year and they paid no dividend and didn't do any buybacks. So their retained earnings for the year would be $100. This is placed back into the company and is an addition to the previous year’s retained earnings (equity account in balance sheet). Also, let's say their market value was $1500 at the beginning of the year. In the next year, if their market value goes to at least $1600, then they matched their $1 investment of retained earnings with a $1 increase in market value ($1600 - $1500). They added value to the company by at least what they put into it. Getting more than $1 in market value is even better (the elusive “more earnings from little incremental capital” - read as durable competitive advantage). But not all companies can do this. Sometimes when a company invests an additional $1, they only get say 75% (or less) out, and the new market value is say only $1575. This is because 75% of the investment produced enough additional earnings to grow market value, but 25% was eroded away because of replacement costs, need for more advanced equipment to sell the same low-margin product, or some other economic inefficiency. An example was the textiles business back when Buffett bought Berkshire. To be competitive, they would have needed to buy the newest most efficient textile machines. But they still would have earned low margins in textiles on those new machines because of oversea production and domestic competition. So they’d be stuck having to make big capital purchases, but get little return. This slowly erodes market value, or plateaus it. Buffett said this same thing about airlines in his 2007 letter, and that’s where he made the joke “If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.” I’ve been debating whether EV cars are having this repeat of history, today. In that 2007 letter he also talks about the “3 Bank Accounts” which is an analogy for a Great business, a Good business, and a Gruesome business. Sorry that’s so long, I’ve never been accused of being concise :)
@@valuethoughtinvesting3563 Thank you very much for your explanation. Very much appreciated. I'll look for that letter you mention.
@@BradKaellner Brad, good points. Let's not forget the bull market between 2010 and late 2021 was extraordinary for US equities, 2000 - 2010 was the so called "lost decade". I wonder how his so called magic formula would have done in this timespan. Note also that, given that corporate earnings drive equity prices, thus valuations can't outgrow earnings forever.
Hi Brad, my humble opinion is that MF is a statistical approch that needs a high diversification to succed, like the case of Graham’s approach to net nets. Your modification has interesting intuitions but you miss a big component of doversification by applying these filters.
the strategy essentially exposes your portfolio to the value and profitability factor documented by fama and french, exposure to those factors even on a concentrated basis would still work (yes even with just 10 to 50 stocks), however your portfolio's dispersion would also increase, meaning that the outcome of the concentrated portfolio would be highly variable, so diversification works IF you want a portfolio that is consistent in capturing the factor premium with less variation in outcomes, however if you want to try making it big with potentially even higher returns then having a concentrated portfolio is better (although a longer holding period is required in order to reach the desirable outcome due to the high dispersion mentioned earlier)
actually after reading some papers about the magic formula, it's unclear whether the portfolio would actually (and consistently) expose your portfolio to risk factors, there are mixed evidence as far as the data i found go, some say the formula yields higher absolute return due to higher market risk exposure (higher beta), some say the formula loads on the value factor especially on large caps thus explaining the higher absolute return, there's another paper saying the formula loads on both value and profitability factors, and even several ones that show the magic formula having negative loadings on almost all risk factors documented within finance academia. alas, it's unclear for now, the evidence is mixed (although intuitively it should expose your portfolio to the value and profitability factors, intuitively, empirically it's still unclear)
Brad put in some swedish serial acquirers in there. Based on ROCE (fcf over capital employed)
I've heard about these Swedish compounders...
Brad, would you mind sharing the list of gurus that you follow for ideas?
I believe Mohnish Pabrai has said, that The Magic Formula is a good spot to hunt for individual stocks that are within your circle of competence, are wonderful, and come with a good margin of safety. So I'll keep monitoring the list and hunt ideas from there (as well as getting ideas from Gurus).
Stock compounders prefer museum coffee can businesses instead of turnover little papers without meaning. Good decision! The videos where fun though, seeing you articulating thoughts throught the selection process.
How long did you use until quitting? Less than 2 years? It is definitely not for you.
I think a good metric is the combination of a high ROI along with a high and consistent FCF, bought at a reasonable to low price. Hold on to that company as long as the story doesn't change.
Yep. What more do you need?
Thanks for sharing the results with us.
The long term companies require being very savvy in fundamental analysis, or simply being a shameless cloner. Would love to hear your picks.
You're welcome my friend! Picks coming soon :)
I just like to peruse the MF screen for hidden gems or potential compounders in which I can concentrate & throw in the coffee can; ie, a Phil Fisher business at a Ben Graham price. That’s it. I don’t follow the ‘rules’ otherwise.
How about a Magic Coffee Can, I think the Magic Formula 1 year mark is primarily for tax loss harvesting and is a good time to rebalance. Also blindly following can save time for those who aren't interested in the additional research.
I think it's a great approach for those who don't want to dedicate much time to investing! Magic coffee can has a nice ring to it :)
I see you didn’t have much luck with WTRH as well. Same with me!! Good luck on the new strategy. I’m looking forward to following along!
Haha, that's an understatement on Waitr! Perhaps it's currently the deal of the century ;)
Did u have a chance to read phil towns New annual letter
Link?
@@davidjmazur youtube not allowing me to post here
No! Where can I find it? If you're on Twitter send me a DM!
@@BradKaellner sure. Just sent it
@@abdsam6853 My man
In my opinion, in today's world, it is not possible to make dominant yields with a simple mechanical approach. We have machines that can do that. The alpha lies solely in a fundamental approach, i.e. in a combination of quantitative and qualitative analyses since machines are not capable of analyzing a company qualitatively yet.
I did think this was an April Fool's joke! It says 1 April on the date for me.
Hi, great video! I am new on the channel :).
Maybe you can try the system that Hamish hodder and Brandon from new money use (understanding the business, good management, competitive advantage and margin of safety). The rules are simple to understand but take a lot of work and research and I personally like that approach. Hamish is also looking for SES businesses, which is also a very interesting model.
Sounds like a fair approach 👌
If 90% of EARNINGS goes to Minority Interest, EBIT or NOPAT are meaningless for common shareholders.
Net income/Invested Capital is meaningful to common shareholders.
Profit for minority interest/Invested Capital is meaningful to minority interest party.
Thus ROIC must take Net Income/IC.
I think you are mixing up the magic formula with a step by step method he provided in his book for new investors.
My understanding is that step by step method is the magic formula
Why not just use the Magic Formula method rather than a modified M.F. method? That just means that you aren't doing the MF method so you are comparing your own idea to the S&P500.
@7:25
The real question should have been, 'If I had simply invested in the actual Magic Formula Method how well would I have done?"
Greenblatt formula is like a dummy's formula fool proof. For someone more dedicated of course you have to do a lot more. There is no simple way of investing because investing isn't supposed to be easy. I've developed my own style and it works best for me to each their own.
I'd wager that the most effective ways of investing must be simple... that's not to be confused with easy
@@BradKaellner After ReReading what I wrote. I have to state that I humbly AGREE with your statement. What I wrote was indeed WRONG. But even the simple formulas are not fail proof there is no such thing as FailProof Investing because of its nature which makes investing HARD. This is what I meant to state. To decrease your odds of LOSING MONEY you have to HAVE MORE KNOWLEDGE of the company and the numbers / facts / grey areas/ risks... etc. and even then there is also "bad luck" on top. So the more work you put in the more rewards you reap that is what I meant to state so it goes beyond a simple formula.
More hat please.
Haha, you got it
I still cant understand 13% is dope u need this compounding but its ok we are all friends here
I can't get over the fact that you dressed like Freddy Krueger😁
That hat is effective birth control
That's good, because I'm so done with babies!
I hear that!
@@justinbeghly1435 Only a few more years before I can get a full night of sleep again
Less risk than the S&P? And the magic formula is going to beat the S&P by a bazillion percent from now on?
Well, Greenblat to me always seemed fishy to me. This is just one more reason to avoid him
Thanks for your videos, Brad. I appreciate your systematic approach to investing. I think you might be using the wrong metric for your comparisons, so I used the Vanguard Mid Cap index ETF (VO) as the S&P500 is market weighted and dominated by the big 5 Tech firms and hence subject to specific risks associated with super-high valuation tech stocks. As it turns out, your conclusion was correct. While you would have made ~6.05$ more than just investing in the Mid-Cap Index, I think the jury’s still out because the time period is so short. ? Just wondering why move from the golden state to Asheville North Carolina? Just wondering, as a lifelong Californian, I’ve been shocked at the number of higher income people transition to other states in the past few years.
2022-4-1 VO $239.07
Date VO Price Total R VO Total R MF
2020-06-30 $161.39 48% 47%
2020-10-01 $178.04 34% 27%
2020-12-31 $207.00 15% 15%
2021-03-31 $224.49 6% 38%
2021-06-21 $239.07 0% -21%
2021-09-30 $239.58 0% -30%
2021-12-31 $254.69 -6% 16%
100$ invested in each period would yield
VO MF
2020-06-30 $148.13 $147.00
2020-10-01 $134.28 $127.00
2020-12-31 $115.49 $115.00
2021-03-31 $106.49 $138.00
2021-06-21 $100.00 $79.00
2021-09-30 $99.79 $70.00
2021-12-31 $93.87 $116.00
Total $798.05 $792.00
14% 13%
Fist one here compounders!!!
Hero level
13f filings, following big traders and 2 billion market cap? Sounds alright.
Disappointed you didn't give a thesis for dumping everything in arkk
Great idea for tomorrow!
@@BradKaellner oh right! It's the 1st here haha
April fools? If so, best ever.
APRIL FOOL!
So......there are a few things I see here. You basically selected 5 stocks from the suggested 30-50. Did you pick the best 5? I doubt it. Looking at your selections, some really poor choices, not things I would want to buy and hold. Bottom line is, you changed too many variables, by "modifying" it, you basically turned it into something you created with a flavor of the magic formula.
I use a combination of Value and Magic and results have been phenomenal so far.
any books you recommend?
Cool hat 🤠
List and rank this PE/NetROIC better:
Combining P/B ∝ ROE and P/E ∝ ROIC into a single formula
Plotted empirical graphs showing convincing proportional correlation of the followings:
P/B ∝ ROE
and
P/E ∝ ROIC
Derivation to find a consolidated single formula:
P/B ∝ ROE
P = k*B*ROE -- (1)
P/E ∝ ROIC
∴ P = v*E*ROIC
k*B*ROE = v*E*ROIC
k=v*E*ROIC/(B*ROE) ---(2)
Substitute (2) to (1)
P
= k*B*ROE
= v*E*ROIC/(B*ROE) * B*ROE
= v*E*ROIC
∴
P/E = v*ROIC ----(3)
v is a variable that explains why sometimes the plotted P/E are hovering above or bottom along the ROIC line.
My logical thought give me a hypothesis to include to following factors:
1. Wacc has diminishing effect on profitability.
2. So far we didn't include growth factor. I wish the earning really can elevate the common shareholders equity attributable to owners of the Company (the minority interest equity is not included as it is not beneficial to common ordinary shareholders at all ).
Hence the growth in common shareholders equity is considered.
∴
Variable v
= (1+Gcse)/(1+Wacc)
Where,
Gcse
= Growth in common shareholders equity
= (CSEn - CSEn-1) / CSEn-1
∴
From (3),
P/E
= v*ROIC
= ROIC*(1+Gcse)/(1+Wacc)
Where:
ROIC
= Adjusted recurring Net Income / Adjusted Invested Capital
Adjusted Invested Capital
= Outstanding Invested Capital - Outstanding Excess Cash and Cash Equivalent
Outstanding Excess Cash and Cash Equivalent
= Cash and Cash Equivalent - Total Liabilities - Total Shares Capital
The Outstanding Excess Cash and Cash Equivalent must be a positive value; if it is a negative value, then reset it to zero.
Outstanding Invested Capital
= Outstanding Total Equity
+ Outstanding Total Non Current Liabilities
+ Outstanding Current Interest Bearing Liabilities
+ Outstanding Interest Bearing Current Leases
+ Current Contract Liabilities - Current Contract Assets
+ Current Deferred Tax Liabilities - Current Deferred Tax Assets
+ Current Other Payables and Accruals
You have missed out a very important point.
There are two types of net income growth.
Constructive Net Income Growth
is observed if the following condition met:
Net Income Growth exceeds the Invested Capital Growth, this will push up the ROIC ratio.
Destructive Net Income Growth
is observed if the following condition met:
Net Income Growth is less than the Invested Capital Growth, this will push down the ROIC ratio.
Please include these philosophies in your future book.
You can extend the same concept to derive in what way the constructive and destructive net income growth influencing the Intrinsic Value.
Good luck.