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No. of Recommendations: 5
With this update I’ve been investing in the Magic Formula for just over 15 years. That’s a long time, and should be enough time to prove out the strategy. After the last update I decided I would shop around to find a better index to compare my returns against to see if it was worth continuing. Since I have a high percentage of money tied up in value investments, I looked at the Russell 3000 Value Index and the Russell 2000 Value Index. I also looked at calendar year returns to make it a bit more detailed. It seems the magic was lost sometime around the beginning of 2014. Since that time my Magic Formula portfolio has mostly lagged the standard and value indexes. Value has struggled in the past decade or so, since 2014 MFI has trailed the broad Russell Value indexes by around 1.5% per year.

What was the magic then? My good long-term results appear to be the result mostly of a couple years where my portfolio bested all the selected indexes by roughly 30% and 20%. The last big win was during calendar year 2013. I’ve been waiting for that big win since, without any stellar relative performance. There wasn’t one year since the end of 2013 where my MFI portfolio beat all the selected indexes.

The returns of my portfolio versus those of several Russell indexes through 31-Mar-2021 are as follows:

Portfolio Inception Date IRR R3000 R2000
Real Money 02-Feb-2006 +9.82% +10.08 +9.06

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 +12.06 +7.96 +4.66 +52.30
R3000 +13.79 +16.64 +17.12 +62.53
R3000 Value +10.91 +11.87 +10.99 +58.38
R2000 +11.69 +16.35 +14.76 +94.85
R2000 Value +10.06 +13.56 +11.57 +97.05

My tracking of the MFI strategy is ending with this update. It doesn’t appear to be prudent going forward to continue investing in a diversified portfolio based on the strategy. Maybe on a risk adjusted basis or some other metric the results are good, but that I don’t know. I hopefully still have a long time horizon and will be allocating the majority of my MFI money to indexes. I may still dabble in a few MFI stocks here and there, but those investments won’t resemble anything close to the strategy laid out in the book.

Best regards and thanks for following along,
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