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No. of Recommendations: 5
I realized too late after purchasing my last batch of stocks in August that I made a mistake and bought a stock I normally wouldn’t have purchased. In this case a company undergoing a merger due to limited upside potential. I bought KLA Tencor (KLAC) and didn’t realize that it was in the process of being bought out by Lam Research (LRCX). I also already owned LRCX from a previous tranche. Overall it will probably work out favorably, but it just goes to show that maybe a little bit better due diligence might not be a bad thing.

The returns of my portfolio versus those of several Russell indexes through 30-Sep-2016 are as follows:
 
Portfolio Inception Date IRR R3000 R2000
Real Money 02-Feb-2006 +10.45% +7.33 +6.56

The following table details performance (IRR) over various time frames through 30-Sep-2016:

Portfolio 7 year 5 year 3 year 1 year
Real Money +14.43 +21.43 +13.25 +10.91
R3000 +13.18 +16.36 +10.44 +14.96
R2000 +12.49 +15.82 +6.71 +15.47

I also have several tracking portfolios that I maintain on Marketocracy as additional 'data points'. These were started on various dates using free data sources available from the internet. These portfolios are rebalanced annually near the date of inception with a small component left as cash to 'pay' expenses. Only portfolios with at least one year of history are included. The annualized returns of these portfolios versus those of several Russell indexes through 30-Sep-2016 are as follows:

Portfolio Inception Date IRR R3000 R2000
MFI 20-Mar-2006 +5.32 +7.21 +6.49
MG1 08-Jan-2012 +10.00 +14.17 +13.02

It should be noted that these tracking funds pay a fee based on the fund size. If I play around and calculate the rate of return numbers and exclude those fees the annualized return are around 2% higher for both funds. Low fees really do matter! As always - caveat emptor.

regards,
j

Notes:

R3000 and R2000 are the internal rates of return for the Russell3000® and the Russell 2000® Indexes, respectively, over the given time period. http://indexcalculator.russell.com/

My self-managed account consists of four groups of 10 stocks each that were purchased and spaced out about 3 months apart. The picks are from the MFI website and selected from the top 50 and then run through a list randomizer. The first 10 on the list that I did not previously own are selected for the next cycle. They are rebalanced/shuffled/changed out on their respective anniversaries. I do not continue hold stocks that are still on the list or buy the same stock that is held in the other three cycles.

Marketocracy fund notes:
Only the MFI portfolio uses actual magic formula stocks picked from the website. The MG1 portfolio consists of the 30 highest ranked stocks from M.Gerda who posts about MFI on his blog.
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No. of Recommendations: 3
Hi NoordelijkOranje,

First I want to thank you for the consistency at which you have reported your results for over 10 years. I think this is one of the most helpful services you have provided to this whole forum on this topic.

I have read all of your posts and have tracked your results in an excel file with drawdowsn. It is encouraging to people like myself who want to try the MFI that you have earned over 10% IRR over a 10 year period even through the crash of 2008. I have a few questions though which I hope you could answer.

1. Please have a look over at my excel file which tracks your results. Is it accurate? I plug in an initial starting capital of $100000 for example sake and get the account balances for the different time frames according to your stated IRR’s.

 NoordelijkOranje  IRR Equity Yearly gain MFI Data IRR R3000 R2000
2006-02-01 $100,000
2006-12-31 5.20% $104,315
2007-12-14 -4.60% $91,729
2008-08-05 -7.86% $81,493 -0.2
2009-11-14 4.48% $117,862 -2.21 -4.52
2010-08-07 0.25% $101,130 0.63 -2.65 -2.85
2010-10-02 2.85% $114,013 2.67 -0.2 -0.45
2011-01-02 5.11% $127,766 8.40% 5.56 2.06 2.68
2011-04-04 5.64% $132,774 6.15 3.2 4.08
2011-07-06 6.99% $144,192 6.43 3.04 3.58
2011-10-01 2.56% $115,401 1.63 -0.7 -1
2012-01-01 4.67% $131,003 2.53% 2.78 1.89 1.49
2012-04-05 6.91% $150,989 3.85 4.08 3.64
2012-10-07 5.29% $141,009 2.77 3.17 2.67
2013-01-01 4.78% $138,121 5.43% 2.15 3.87 3.51
2013-04-01 6.73% $159,485 3.62 5.33 5.15
2013-07-02 8.35% $181,265 5.18 5.47 5.35
2013-10-08 9.62% $202,219 7.39 6.13 6.51
2014-01-08 11.15% $230,914 67.18% 8.53 7.22 7.42
2014-04-06 10.99% $234,325 9.33 7.26 7.34
2016-07-02 11.35% $247,159 9.13 7.64 7.37
2014-09-30 10.96% $246,288 8.17 7.41 6.21
2015-01-04 11.21% $257,899 11.69% 8.72 7.81 7.14
2015-04-05 11.05% $261,369 7.9 7.8 7.43
2015-07-07 11.08% $268,991 7.96 7.6 7.28
2015-10-05 10.42% $260,692 6.3 6.56 5.68
2016-01-05 10.39% $266,514 3.34% 6.06 5.71 5.91
2016-04-05 10.41% $273,686 5.35 6.97 5.6
2016-07-08 10.24% $276,079 5.12 7.07 5.84
2016-10-02 10.45% $288,692 5.32 7.33 6.56

Num DD's Drawdown Recovery Days Drawdown$ Peak1 Peak1Date Valley ValleyDate
1 21.88% $22,822.00 $104,315 31-Dec-06 $81,493 5-Aug-08
2 14.20% 414 $16,732.00 $117,862 14-Nov-09 $101,130 7-Aug-10
3 19.97% 274 $28,791.00 $144,192 6-Jul-11 $115,401 1-Oct-11


2. Drawdowns: Specifically in 2008 with the market crash, can you check how far your equity curve went into drawdown? The maximum peak to the minimum valley. Did it go down 60%, or more of your equity? I am only showing drawdowns of 20% based on your figures, but at that time period they are sometimes close to 12 months apart so I’d love to know the different drawdowns you experienced throughout the 10 year period that were more than 20%. And also if you can let me know how long it took (months or quarters to come back to the peak and return to new highs). Was it 2 years or 8 quarters? It would be wonderful if you could send an excel file of equity amounts at different times, %percentages are what matters if you don’t want to disclose amounts you could scale as though it was $100,000 initial capital or otherwise.

3. A question on the strategy, with fixed $ amounts when buying each of the 40 stocks and about not reinvesting the profit. If I use an example of $100000 initial capital, that would represent $2500 investment per stock. You mention you kept this the same, no matter if it had gains or losses.

a. When did you start increasing the fixed amount per stock, or increasing your overall capital to invest? Example you may have started with $100,000 but gained confidence in the method so increased it to $200,000 and started investing $5000 per stock. Did your IRR take this into account?

b. I’m trying to see what my results would be in percentage terms if I would have simply used $100,000 and fixed $2500 per contract throughout the whole 10+years. Would the IRR be the same, and equity amounts be somewhat accurate? It’s hard to get a picture if you don’t know how much new capital someone put in and when.

c. Is there a reason why you chose not to reinvest the new profits or losses each year into the new stocks purchased? I think in the book he mentions to reinvest the new money into an equal set of stocks. Ex if you spent $25,000 for 10 stocks at $2500 each and after 1 year it turned to $40,000, why not invest in 10 new stocks at $4,000 each? I think your performance would be much greater no?

d. Do you have an idea of how the equity performance would have been had you done that? If I would have reinvested into the same formula, would it have been better or far worse?

e. Instead you used that money to reinvest elsewhere? Should we assume for the calculation of your IRR that that portion of profits simply went into cash and stayed stagnant?

f. Obviously you would have had greater volatility, greater drawdowns in 2008 though and greater returns when things went your way.


4. In your MFI Data plan, that has yielded 5.32% IRR vs your 10.45% at last posting, was this one that just used the top 25 blind picks in from the MFI site each quarter, just picking everything including Chinese stocks? Or was it the one that used ROA and PE from different screens? Details please?

5. Your real money plan that yielded 10.45% return? I think you mentioned that part of this was mixed with a portfolio where you allowed Formulainvesting.com to invest for you. Now had you said that the whole thing was invested in your own method, 40 stocks 10 randomly picked each quarter, it seems reasonable to assume, if I did the same thing, I would get similar results 10%. But would you say that your IRR from your method, was similar, better or worse than the results from the portion that formulainvesting.com got for you? Appreciate your help here because the fact that you recorded your results for 10 years is like a verified backtest and gives encouragement to others, but if we don’t know how much the results were skewed by formulainvesting.com influence and how similar their results would have been to your own had you only done your own 10 picks per quarter.

I know I’ve asked you some pretty detailed questions and I hope you don’t mind. I just think you’ve done a fabulous job at being consistent and patient with the formula for over 10 years and that you’ve made your results available for everyone to see. This is quite encouraging and I’d love to have a conversation with you or get your detailed answers on these questions. I hope you don’t mind so many questions.

All the best,
Jason
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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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