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Jason,

Sorry for the late reply. I'll try to answer all your questions as fully and accurately as I can, though it might be over a couple of posts and not exactly in the order you asked them. I'll likely answer the easy ones first and then continue to answer them until they are all done.

A couple of items first. From the time I started investing, I fancied that I'd be a value-oriented, long-term, buy and hold investor after researching and reading up about it. I have several stocks and mutual funds that I've held for over 25 year, so mostly I don't trade a whole lot with the bulk of my portfolio. Magic Formula stocks make up about between 5 - 10% of my overall portfolio value depending on relative performance to the rest of my portfolio. Much of my portfolio is index funds, some actively managed funds, some individual stocks, and then I play around a little with covered calls and special situations and merger arbitrage. So for me, MFI was an interesting experiment and if it didn't turn out satisfactory then it wouldn't sting too much. I was also committed to stick with it for a minimum of 5 years to see what would happen (though, in all honesty, if it totally blew up I might have bailed out earlier). In the past I'd played around with the Dogs of the Dow strategy using unit investment trusts when brokerage fees were still much higher than today's fees. So a mechanical trading strategy wasn't something that I found too far away from my comfort zone. Plus, I think MFI really intuitively makes sense.

I think along the way I'd read that you shouldn't track your portfolio too neurotically; it might have been Peter Lynch that wrote that in one of his books. For me, that meant I decided to only update my stock and fund prices on the last day of each calendar month. It helps to smooth out some of the volatility and as my portfolio grew I just didn't want to know the daily ups and downs. Granted I know if the market goes up or down 1% my portfolio is probably somewhere in the ball park, but I don't want to know the exact dollar amount. Only recording the prices once per month means I might not get the exact highs and lows of the portfolio. Long-term it doesn't matter to me as long as my net worth grows, and my pile of money gives me some level of comfort and/or confidence to tell my bosses what I really think and not what they might have wanted to hear. However, if the returns from my strategy stray too far from the indexes then what is the use in my extra effort? Long-term my extra effort has added maybe about 0.5% of additional return above and beyond the index returns. Not spectacular, but enough to keep me interested, and I find that investing is mentally stimulating.

Interestingly enough, I recently watched a webinar hosted by Research Affiliates (Rob Arnott) and they found that after publications, factor-based strategies' alpha was about half of what was reported in the studies. Did the same fate befall MFI? Maybe. There originally were a fair number of investor blogs that were following MFI with real money. They all dropped the strategy after a couple of years when the entire market crashed (or they just stopped blogging and no longer reported their results.)

regards,
j
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