i think everyone here should be reminded that value stocks without a catalyst are value traps

That's not true. Value stocks without a catalyst THAT WILL DESTROY THE EXISTING SHAREHOLDER VALUE, while you wait for the market to "recognize" said value, are value traps.

A stock being sufficiently undervalued is catalyst enough as long as the business isn't dying. Just need patience.

hey guys. I just finished Greenblatt's Magic Formula book and though it was pretty good. One question, why does Greenblatt only hold stocks for 1 year periods in his formula? Doesnt it seems better to hold a bit longer like 3 years when buying depressed companies - to give them a bit longer to comeback into favor or realize value?

Thx

I believe he has the 1 year holding period because that was the time period he used for his historical study. The point of the MF is that it's systematic and should not be tweaked. If you were to stretch out the holding period to 3 years, then you would need a considerably better returns to match the single year return compounded by years 2 and 3 to properly compare holding a cheap stock for 3 years. Another reason to avoid a longer holding period is to avoid value traps or at least move on and more profitably deploy capital.

I thought part of the point was a tax issue (sell losers before one year and winners after one year) and to constantly be reallocating to the cheapest stocks. I could be misremembering though.

I would agree with Doom here. Initially I was thinking "sell the losers, keep the winners," but I think the point is to keep cycling into the cheapest stocks. If I remember correctly he says that it should only take 2-3 years for them to come back?

I just bought the book on the recommendation here. In fact, I ordered a few books, they shipped, decided to google the book, and found a PDF file of the book online. Read it that night, and I'm now rereading it since the book arrived yesterday.

I don't have the extra money to open up a large investing account so I am starting off in a simulator to see what happens.

What I did was took the top 30 companies at >100, put them into Excel, and then went through and found the numbers for each company. Then I took the top 5 in each category and reranked them and took the top 3 from that and bought them in my simulator. Over time I am going to buy 2-3 each month until I get up to about 24-30 stocks.

I just started yesterday so it's still too early to tell. The concept seems pretty straightforward and for the first time in a long time it was like a lightbulb went off and everything started to make sense to me. We'll see what happens.

MKC is compelling to me. Shareholder friendly management. Stable growing #s. Easy to understand business that won't be blindsided by some new technology that makes seasonings obsolete. Just wish it was cheaper.

Seems like the type of company buffet would buy.

I just referenced my copy of the book and in the "Step by Step Instructions" section, Greenblatt recommends a one year holding period because that's what his firm used when doing the analysis. He then goes on to making an adjustment to the holding period +/- day depending on whether the stock is a winner/loser and the tax status of the account.

In the appendix he also wrote that he didn't have many consecutive three year periods of data. I'm not sure why he didn't use rolling three year periods to substitute this, but whatever.

so did Greenblatt use 1 year because it was an 'easy' way to run his simulations or because he believes that exactly 1 year* is pretty close to the optimal time frame for this (meeting the other criteria of the MF)

So far it seems to me he just picked 1 year kinda out of thin air, but I doubt im correct in thinking this. hopefully someone can show why 1 year might be (close to) optimal here?


*+/- a few days for tax reasons

I'd guess that the 1 year holding period is kinda random. Would be nice if someone could backtest the strategy for every holding period between 1 and 1000 days, if the strategy would work you'd expect some sort of curve of outperformance (possibly around the 1 year period).

I don't think holding period should be too strict. If one of the stocks rockets up close to its valuation quickly you can sell it, if it hasn't moved in a year but its still amongst the most undervalued securities on your radar, keep holding it.

My only thought is that selling the losers before the 1 year mark is best for the tax reasons.

But another thing I'm not understanding is that in Chapter 10 he mentions that it could take 2-3 years for the market to realize the value of the company, but yet he has the reader selling yearly.

yes exactly, it is a bit confusing. It seems he just gives in and picks the 1 year time frame because it is easiest for the general reader to stick to, rather then trying to explain what Xaston said above - which is vvvv hard to do correctly over the long term; at least as I understand it.

Yea the point of the magic formula is to just make it all very mechanical and foolproof.

I just think if you're coming to 2+2 and talking about it then you see value in figuring out why the magic formula ends up with good results, and what things you can do to improve on the framework.

Visteon seems compelling based on a back of the envelope calculation. It's post reorg company that sells auto parts like consoles and air conditioners. They own 70% of a Korean company that is worth 1.4b alone. Mgmt's projected EBITDA is ~680 and the market cap plus debt is about 3.2b. (All these numbers were by memory, sorry if theyre wrong).

I have a question about the Greenblatt strategy that we talked about recently.

Late march I opened a sim account and have been holding some stocks since then. The portfolio has been doing pretty well, pretty much outperforming the S&P.

I got my friend into doing it too and might have a 2nd friend interested in trying it out. I'm testing it out to see how the strategy does, he's testing it out to learn about the stock market.

He has a stable job, but not a lot of money because of bills and what not so his savings really isn't investment worthy.

We were talking about a bankroll that he could start with down the road, maybe a year or two from now and he was thinking maybe $5,000 might be possible.

The strategy says 20-30 stocks so that leaves him about $400 per stock, at the most.

My question is, is it still feasible if he just started with $5,000 and bought 5-6 stocks and started out? Then over time he builds it up? So let's say $6k for 6 stocks. $1000 in each, holds for a year or until he has enough to buy another, then over time he starts building up his portfolio (hopefully as the strategy works and he has profits)? So it might take him 2-4 years to actually build up a portfolio of 20 stocks.

I haven't read it but in his new book he talks about value weighting indexing. That seems like a better idea for him

Are you aware of any low-fee investable value weighted indices? As far as I know there are no ETFs of that sort so far.

I actually forgot about him mentioning them. He talks about them in his book, "The Big Secret for the Small Investor." I don't know if I would recommend the book though.

I went back through and skimmed the last few sections and I don't think he mentioned any value weighted funds.

Anyways, he lists some Value Index ETFs (NOT value weighted):
I = iShares
V = Vanguard

IWD
IWN
IWS
IJS
VTV
VOE
VBR
EFV (international)

I personally prefer the individual value stock route that he mentions in his book because I have control over only selecting the companies with the highest earnings yield and ROA - based off his stock screener.

Yea, those aren't value-weighted.

Gotham runs a hedged strategy that is similar, but that is not available to retail investors.

Fwiw, here's a recent article by Greenblatt on "Adding your two cents"- comparing "self-managed" vs algorithmic construction of the formula investing:
http://news.morningstar.com/articles...ED.HTML&_BPA=N

Anyway you could PM me or quote the 2nd page? I don't have an account and don't want to sign up for one.

Quoted for all

Thanks!

From what I'm understanding is that the article is saying the reason why some people did worse was because they weren't following the strategy. They were changing it up to suit their own fear of losing money or trying to double up after it already went up.

Is your term "value weighted indices" synonymous with fundamentally-weighted indices? If so, what about PRF or PRFZ?

TY anklebreaker.