Comments on: Review: The Little Book That Beats The Market

By: Mark

Mark — Sun, 22 Jul 2007 19:58:10 +0000

I have the book it is a good read i have followed it and I am in the 20% range ahead.

By: Gaming the Credit System

Gaming the Credit System — Sun, 22 Jul 2007 06:12:55 +0000

Well, thanks for saving me the time of having to read it! Seems pretty straightforward.

By: The Property Investor

The Property Investor — Sat, 21 Jul 2007 08:08:49 +0000

The magic formula idea suffers from the same problem that all betting systems do, you have to have an infinite bank to be able to survive the long losing run that will inevitably come and wipe you out. Any betting formula, no matter how simple or arcane, is dependant for its sucess or failure upon the size of your bank. Best to always remember that.

By: Jay

Jay — Fri, 20 Jul 2007 21:06:34 +0000

over at yahoo groups, there have been several discussions around how good this “magic formula” really is. I have been a lurker there for at least a year now. Seeing many portfolios hit the 20%+ range, I started my own model portfolio at the beginning of the year for 5k. I am up 32% as of today, even with a couple of stinkers on the list. As Toby mentioned above, it may be magical only for a few more years. I can’t predict that, but seems to work for me in the short term and from what I’ve heard on the forum, it has been working for others also. You can view results here from someone who has done this for 1 year and kept good notes: http://justadrone.blogspot.com/
I would agree with Toby in mentioning that this should not be looked at as a fool-prrof way to make money in stocks. After screening, a prudent investor should check out the background of the companies before putting down any money. Magic Screen + Personal Research appears to be the best way to go.

By: MossySF

MossySF — Fri, 20 Jul 2007 20:59:26 +0000

My philosphy is the reverse — robot is better. Unless you are Warren Buffet with direct influence over the company stock you buy, it’s just random luck whether you outperform or underperform the market. (Case in point, Monkey versus Cramer where the monkey randomly choose Yay/Nay on Cramer’s picks beats his performance — or previous studies on dartboards beating analysts.) What you can’t manage in investing smarts, you can make up by keeping costs down and sticking to a disciplined system. Magic formula is pretty much indexing at a micro-level. Instead of 1000 small cap value stocks, the computer picks ~30 small cap value stocks. Fewer picks gives you the possibility to isolate higher returns (deep value) but at the cost of higher risk.

By: Toby

Toby — Fri, 20 Jul 2007 19:48:27 +0000

A better title would be _The Little Book that Used to Beat the Market_. Or, rather, that will be the title soon enough.

While I am all for using solid fundamentals to identify potentially undervalued stocks, the caveat you must keep in mind is that any automated stock selection process (which this qualifies as) will deteriorate over time as more people use it (and the more automated the process, the more quickly that will happen). As more people utilize this method, the inefficiency in market valuation that it exploits will shrink and the returns will diminish.

Don’t believe me? Check out O’Shaughnessy’s _What Works on Wall Street_. In that book, the author surveys a number of stock-picking methods and crowns Ken Fisher’s “Low Price-to_Sales Ratio Stocks” as the “best” method. The only problem is that this stock picking method is old-hat and doesn’t really work anymore. Ken Fisher said so himself in his book _The Only Three Questions That Count_.

While I have used Greenblatt’s website to generate investment ideas (which require further investigation), I would be really apprehensive about robotically buying stocks picked by a stock screen. That’s just asking for trouble.

Finally, if you want a real book on stock investing, pick up Benjamin Graham’s _Intelligent Investor_. Published in 1949 and still relevant to this day! If it bores you or you can’t understand it, then you are probably not ready to invest in individual stocks. If you spend the time to understand Graham, you’ll see that many of the concepts he puts forth over 50 years ago are being used and quoted by the investment writers of today. I guarantee that it will bring more recent investing texts into a different perspective.

By: MossySF

MossySF — Fri, 20 Jul 2007 19:24:16 +0000

I carved out 20% of my IRA for this strategy. Only 4 month track record currently but it’s been outperforming the closest benchmarks (Small Cap Value) during this time. The key is free trades — without free trades, commissions will eat cut into your profits where you’d probably underperform. My numbers since the start of April in comparison to the various Small Cap Value options:

Magic Formula – 13.7%

DSV SPDR DJ Wilshire Small Cap Value – 5.90%
IWN Russell 2000 Value Index – 0.88%
JKL Morningstar Small Value Index – 2.81%
IJS S&P SmallCap 600 Value Index – 7.13%
VBR Vanguard Small-Cap Value (MSCI) – 4.49%
RZV S&P SmallCap 600 Pure Value – 3.40%

By: eR0CK

eR0CK — Fri, 20 Jul 2007 18:27:10 +0000

Oops, sorry about that … my comments weren’t showing-up at first!

By: eR0CK

eR0CK — Fri, 20 Jul 2007 18:26:21 +0000

Hey Trent,

If you go over to “All Financial Matters” they have a running portfolio using the methods outlined in the book … the portfolio is up 25%+

By: eR0CK

eR0CK — Fri, 20 Jul 2007 18:24:21 +0000

Hey Trent,

Here’s what AFM has come up with so far using the “magic formula” presented by the book above.

I think you’ll be surprised by the results:
The Little Black Book Formula Portfolio