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Ouch! After three months like end of 2018 it is somewhat painful to look at investment accounts knowing that the overall indexes went down. Over a short time period it is somewhat artificial and is just noise (volatility), it’s the long-term results where it matters most. I say this with the expectation that at some point going forward the strategy starts to outperform the indexes again since the last few years show that my returns have been lagging.

The returns of my portfolio versus those of several Russell indexes through 31-Dec-2018 are as follows:
Portfolio Inception Date IRR R3000 R2000
Real Money 02-Feb-2006 +9.42% +7.49 +6.25

The following table details performance (IRR) over various time frames through the end of the quarter:

Portfolio 10 year 5 year 3 year 1 year
Real Money +16.74 +5.16 +4.69 -12.94
R3000 +13.18 +7.91 +8.97 -5.24
R2000 +11.97 +4.41 +7.36 -11.01

I currently have several tracking portfolios that I maintain as additional points of reference based on a free data source available from the internet. These portfolios are rebalanced annually near the date of inception. The annualized returns of these portfolios versus those of several Russell indexes through 31-Dec-2018 are as follows:

Portfolio Inception Date IRR R3000 R2000
MG1 08-Jan-2012 +6.83 +12.23 +10.28
MG1-lgcap 01-Jan-2014 +9.98 +7.91 +4.41

Long-term, the strategy has worked for my account invested using real money. It is hard to stick with the strategy when it isn’t working out over shorter time periods, as noted in the book. From my perspective, one recurring problem with the MG1 tracking portfolio is that is skews heavily toward small cap stocks. Small cap stocks have not performed as well as large cap stocks recently, especially using the Magic Formula. Since inception roughly 80% of purchases in the MG1 portfolio have been small cap stocks. In my limited ability to slice and dice all my data I am using a cut off of around $5B or lower market cap to define small cap stocks (this comes from Quicken). For the MG1 tracking portfolio, the large cap stocks would have returned 20.5% annualized. Man, oh man! If only I knew now what I thought I knew then; as always, hindsight makes it really easy. This may not predict future returns if small cap stocks start doing well again. Staying away from the very small stocks is probably what has saved me. At the very start of my MFI investments, I set a minimum market cap cut off for screening at $50M. Near the end of 2007 I selected a minimum market cap of $650 million and then by mid-2009 my minimum market cap was nearly $1 billion. From 2014 onward, the minimum market cap for screening ranged from $1.1 to $11.5 billion, mostly greater than $4 billion. What stocks you picked are important as can be seen from my lagging returns for the past 3 years.


1) Russell3000® and Russell 2000® Index returns are sourced from:
2) 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 top 50 list 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.
3) The MG1 portfolio consists of the 40 highest ranked stocks from M.Gerda who posts about MFI on his blog. The MG1-lgcap portfolio uses the same list of 200 stocks and selects the 30 highest rated stocks having a market capitalization greater than $6 billion. The tracking portfolio(s) are only rebalanced once per year near their anniversary dates.
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