Mohnish Pabrai on Improving the Magic Formula Investing Strategy
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- Опубликовано: 7 июл 2024
- Mohnish Pabrai on Improving the Magic Formula Investing Strategy // In his book The Dhandho Investor, Mohnish Pabrai suggests a hack for how to improve your investment results using the Magic Formula from Joel Greenblatt. I also share a few other ways to narrow your list based on what we've learned studying 100 Baggers.
Have you had any 100-baggers in your portfolio?
Hey Brad!
Most businesses lack defensible moat, meaning the “goodness” of the business fades away.
That said, when you try to improve on magic formula (or any quantitative screener) for quality, the effort is futile given the quality is already fading away for most businesses.
Acquirer’s multiple also makes the same argument. And it makes sense.
In Summary, unless there is a defensible moat then cheap is better regardless of the quality.
Will love your thoughts ??💭
I'm going to nerd out over this so hard!
Brad, your content deserves millions of views. You provide some of the best value investing content. Unfortunately most of the RUclips population is too dumb to see that. Instead they opt for channels like everything money that only touch the surface.
Nice information thanks for sharing
I'm so happy I found this channel, tons of high-quality information - exactly what I need to get that much closer to getting my first 100 bagger :)
Just come across your video. Fantastic video.
Thank you my friend! I look forward to interacting with you in future videos :)
Excellent video!
This video is gold!
So glad you think so!
Thank you for an excellent video.
Amazing!
Thanks for sharing...
You bet! Thanks for watching :)
Brad you a gift that keeps giving. I am glad that I discovered your channel, keep up the good work. I am still trying to find a video on your take on the Acquirer Multiple.
Just stumbled upon channel! WOW! Thanks alot for the amazing video!!!!
Thanks for visiting!
Great info on resources!!! TY!
thank you, this encouraged me to make my portfolio public. The Dando investor!! also read this - great book.
Yes, probably the most underappreciated investing book out there!
Super video as usual👏👏👏👏
Love the added insights you give. Thank you!
I'm glad they are helpful Jason!
Hi Brad, I discovered your channel by accident and I just loved it. For me it is the best YT channel for stock investing because you share both the investing principles used by superinvestors and your own twist applying this principles.
I have been reading financial reports since my young age and my past of entrepreneur helped me better filter informations in regulated financial reports. I am more focused on European companies but I am starting to get interest on the US market. Hope that we can exchange info in the future. Peter
Love this video and the detail thank you so much
I am learning so much about smart money. Nobody shares this. In my view you are greater than Mohnish, because you are sharing the recipe
Well without Mohnish there would be no stock compounder ;)
Great information, thank you for sharing! Subscribed!
Thanks for watching!
Hi Brad, just come across your channel and really enjoying it. After learning how to analyse companies, finding it overwhelming, and very hard to have the time to do this effectively, I decided to see what other, more intelligent investors, with more time on their hands are doing. Plus after reading 'the little book that beat the market' it got me thinking there must be an easy way to combine the two ideas for a more convenient way to invest. This lead me right here, and I have to say we're very much on the same page, so I'm looking forward to joining in on this journey. New subscriber looking forward to more content 👍
Great video Brad and great info
I also follow mohnish and did some investments.
I am going to invest based on magic formula and your suggestion.
Continue the good work
No financial suggestions here Ravinder 😉
honestly i really love your videos! just wish theyd be shorter by half, more summarized,
Great! video Brad, good work. thanks
You're very welcome!
Insider buying could potentially be a valuable signal, or at least if they not selling.
Agreed, I use OpenInsider for that
Thank you for introducing me to MagicDiligence...Would you think the better selections would be those "all in the green" on
Statistical Diligence? Or are you just concerned about the "Current Ratio" you mentioned. Maybe a short video going over MagicDiligence might be helpful.
Thanks for the suggestion! I don't use MagicDiligence much anymore unless I want to get a quick reading on Earnings Yield.
I am new to your channel Brad and like the pace of your videos letting beginners like me comprehend them well. Hasnt Pabrai sold off his Graftech shares at this point of time?
Yes he is entirely sold out of GrafTech, and I am too. Those 3-5 year take and pay contracts are no longer guaranteed revenue.
Thank you very much for your videos. May I know where did you find Mohnish Pabrai's portfolio? Does dataroma list that?
Yes Pabrai is included in the dataroma superinvestor list
Thank you for the videos Brad. Quick Q: I own Greenblatt's mutual fund GENIX. Can you comment on whether you think it's a good fund to be invested in? Should I avoid mutual fund investing like the plague? I wanted to capture Greenblatt's magic formula but in a way where I was separated from the ins and outs of management. What attracted me to GENIX is the fact that it utilizes the magic formula to determine which stocks the fund buys long (300 stocks), and then uses the inverse of the formula to go short 300 businesses. Another question that comes to mind: can you help me nail down long/short overlay mutual fund? Thanks for your attention, Harry
Has Greenblatt said what returns he thinks the fund will generate over the long term? If you're going to go the mutual fund route, Greenblatt is probably a great choice. I just don't know enough about the fund to have an opinion on it. One thing I'm curious about is how he's shorting the worst magic formula performers. In this book "The Little Book That Beats the Market" he cautioned against shorting the worst performers because the market can stay irrational longer than you can stay solvent. Perhaps there's a reason that's not true for this particular fund.
@@BradKaellner Right, you could have Murphy's law hit where stocks bought long under perform and stocks shorted over perform.
The objective of the fund is to outperform the s&p over a business cycle. What is the duration of a business cycle?
Harry Emerson 5.5 years from what I could find. I’d be curious to see some backtesting results from this fund approach
Brad, great thought piece. I’ve come back to this a couple of times now. Have you thought about layering on a price momentum factor onto the list of qualifying securities? Thanks
Thanks Kenneth. I don't have any experience with technical analysis, but how would you go about incorporating price momentum?
MACD (months timescale) or just 10 month moving Average vs current price.. This is what I am planning to use but would be keen doing some backtesting first and not sure how...
My biggest question about the magic formula is why hold for one year? In the book Joel mentions a loser you sell less than a year and a winner sell a few days passed a year for tax benefits...well, what’s to stop me from holding any other amount of time? Even on a short term scale as low as a week to a month or quarterly holding? I’d be interested to see a comparison of people following the MF to a tee compared to someone who sold losers as soon as the lost some rudimentary % drop like say 5-10% rather than holding it for a year and chocking it up as a loser. Or having someone hold the winners for extended periods of time such as a lifetime stock or yet another time frame beyond just the 1-2 year timeframes. Just some of my thoughts about the MF and digging carefully after having read the book. Thanks for your analysis
The formula was designed to be simple and to remove decision-making from the process. Most investors who attempt to time the sale with a stop loss or holding for life will do more harm to their portfolio than good. These small cap stocks tend to be volatile, and with a 5-10% stop loss you won't have anything left in the portfolio after a short period of time. If a year seems too short for you to hold (and it feels too short for me personally) you may want to follow a different approach such as cloning great investors and waiting to sell until they sell.
hey Brad, what is your source to find if Owners / CEos are share holders ?
I've been using GuruFocus, but I'm sure there are other great sites for this info
I'd love an update on using this strategy.
Me too! Unfortunately I’m not implementing it currently. Can someone agree to test it and report back over the next 20 years?
@@BradKaellner Wait, what? Why aren't you implementing it?
@@timbarker544 Hey Tim, since I wrote that comment I HAVE started implementing it! Guess it was the nudge I needed :) Too early for an update... it's basically a 3-year coffee can approach. Checking performance daily or weekly would drive me nuts and be counterproductive.
@@BradKaellner Hey Brad, I like the strategy. I was doing something similar, but have since tweaked my method to incorporate yours. The other piece that I do, is take Magic Formula Stock screener and other candidates:
1) P/E ratios > 0 but < 1
2) Tobias Carlisle's acquirer's multiple top 30 large cap list
3) Rule One Toolbox screened list (w/multiple steps)
4) Plus any personal value judgement calls
and then check the market price against intrinsic value (via rule1toolbox, stock2own, gurufocus), and narrow down these lists to the best candidates who are considered undervalued as calculated from these sources. I figure if the intrinsic value is calculated similarly by different sources, then it is probably a fairly safe valuation.
FWIW
Hello Brad, I am a professional investor from Europe, any websites that you know similar to the magic formula or value investors club for European Stocks? Thank you very much
I am not aware of any sites like that unfortunately. Are you familiar with Magic Diligence? Perhaps reach out to the owner and see if he knows of any services similar to his for Europe.
There is an acquire multie one... Free to sue for big cap.
Where I can get insider ownership info?
The most accurate way is to look at the proxy to the latest annual report. Value Line screener gives fairly accurate numbers as well
Why narrow the list? Joel Greenblatt sugestia to do at least 20, his research showed that cherry-picking stocks leads to worse results then buying all of them. Although thank you for the information about value investors page.
Hey Brad, enjoyed your video! thanks for all the info
Q: What if you held the magic formula stocks for more than 1 year, and whys the reset important you think?
Great question! I don't know the answer, but I have two guesses... 1. When Greenblatt backtested the magic formula strategy, he got the best results with a 1-year hold period. 2. It's easiest for folks to implement a strategy where they hold for one year and then reset. It may very well be some compromise between performance and user friendliness. The importance of simple-to-follow rules in a mechanical strategy like this should not be underestimated.
@@BradKaellner thx for the reply! If 1 is true, he doesn't say it explicitly? (just finished the book lol) and 2. wouldn't it be even easier if you held the top 30 for 3+ years, the timeframe he mentioned that will allow Mr. market to get it 'right'?
@@aaaa-cq2qx I can't remember if he says it explicitly, and it seems I'm not the only one ;) the second point of waiting 3 years for mr. market to get it right implies that you've done a full analysis on it, not just the magic formula screen. there are many other factors to consider in valuation, such as intelligence and integrity of management, economic moat, etc. but I like the way you're thinking!
@@BradKaellner Great thanks! Funny i found your channel when I just finished the book. Maybe Google does know!
@@aaaa-cq2qx Google knows more than we want to believe ;)
I think you may be combining 2 strategies that work well independently but do not increase performance when combined.
I'd love to hear more! What are you basing that statement on?
Stock Compounder - Brad Kaellner i was thinking that 100 baggers usually have large earnings growth potential whereas magic formula stocks are usually companies with depressed prices. I believe this is why magic formula stocks are held relatively short term because of the mean reversion and 100 baggers never come from holding short term. It is like cooking, two foods may be good alone but don’t compliment each other. Does that make sense?
@@tuckert3431 magic formula stocks do have depressed prices, but they also have strong ROIC which means they may also have large earnings growth potential. it wasn't so long ago that AAPL showed up in the magic formula list.
Stock Compounder - Brad Kaellner Agreed. However think about this. What is the probability aapl is a 100x from the time it appeared on the screener? I do think you are onto something though.
@@tuckert3431 I definitely did not see AAPL as a 100 bagger, but a double or triple in a few years is good for the portfolio too ;)
MagicPEG
Since interest rates are so low, having companies with higher debt could be better. This companies are leveraging debt and not equity to grow.
Any idea if the holding period should be extended or shortened if capital gains tax was not an issue? What would be most ideal?
Is 1 year too short for the market to agree with value stock intrinsic valuations?
Magic formula videos sure got flushed over the last couple years 😜