One of the most frequent questions I get is "How do MagicDiligence picks fare against the unfiltered Magic Formula® Investing (MFI) screens?".
It can be a difficult question to answer. While Formula Investing does run a few mutual funds that use the MFI methodology, they include only large cap stocks and do not map very well to the actual screen results from theofficial site, which is usually as much as 75% small-caps. The best way to answer the question is to take the actual "50 stocks over 50 million market cap" list from the MFI site on the day of each recommendation, average their results over a holding period, and compare it to the result of the MagicDiligence pick on that day. [more]
So, how did the Magic Formula® Investing (MFI) strategy perform in 2011? In a word: poorly, along with pretty much any other fundamental value strategy, and small cap indicies in general. Simply put, 2011 was not a good year to be a value investor. For one of the few times in history, most quantitative fundamental value strategies significantly trailed most of the major benchmarks.
The weekly sample screens and their performance vs. the S&P 500 can be seen at the bottom of this article. Each entry represents one of the actual "Top 50 stocks over 50 million" screen listings from the official site. The composite performance is an average of the individual performances of all 50 stocks screened on that day, including dividends. The ending date for the calculations was market close on 12/23. [more]
Magic Formula Investing (MFI), as described by hedge fund manager Joel Greenblatt in The Little Book that Beats the Market, consists of ranking stocks by earnings yield (cheap) and return on capital (quality), adding the rankings together, and buying from the resulting lists. Below are stocks that have moved into, and dropped out of, 3 of the MFI screens used by MagicDiligence: [more]