The Little Firm that Overcharges Investors? aka A Magic Ripoff?
As someone who has read and really enjoyed Joel Greenblatt's books in the past I always listen to what he has to say. His work "You Can Be a Stock Market Genius" is one of my favorite investing books of all-time. Having said that, to me Greenblatt's latest venture seems like a complete joke.
I received an e-mail from a firm called "Formula Investing" several weeks ago because I had signed up for access to the query tool on Greenblat's Magic Formula website at one point many moons ago. The concept of the magic formula is interesting and the book that it was unveiled to the world in, "The Little Book That Beats the Market" was pretty good, but do we really need a firm to help us invest using the formula?
This is quote from Formula Investing's CEO, K. Blake Darcy, one of the most hilarious quotes that I have ever read:
"Many readers of The Little Book That Beats the Market wanted to follow the
strategy Joel outlined but were unable to devote the time and attention
necessary to implement the strategy properly"
Ahhh really, K. Blake? People don't have the time or attention to invest using the magic formula?
The formula was published in a book that Greenblatt wrote so that his children could understand investing, literally. So the formula that the firm uses to create portfolios is not difficult to understand and it is readily available for anyone in the world to use.
PLUS, the book states that to use the formula properly one shoud rebalance their portfolio once every year! Is that really all that time consuming? Sure one could stagger the year deadline so one stock gets turned over every month or so, but pushing a button or two once a month is hardly time consuming.
I suspect that one could manage a magic formula portfolio for an entire decade in the amount of time that it took the aforementioned person to read The Little Book That Beats the Market.
To me, paying someone use a simple formula that I already know to shuffle my portfolio around once per year for a fee of 1% of my total assets is hardly worth it. I suppose that assuming that the 1% includes the cost of buying and selling stocks that this isn't that bad a deal if you had a small account with the company, but the fees become outrageous as the size of one's account grows. Let's say that you had invested the minimum $25,000 with these guys. 1% of that is only $250 and you'd probably incur a trading cost near that with a constantly rotating portfolio of 20 magic formula stocks. Not too bad.
However, if you were to stick say a cool mil with these guys then you're paying them $10,000 per year for practically nothing and you're getting royally screwed. Don't get me wrong, I'm sure that there's a TON of "money managers" out there that charge their clients more than this and yet will produce worse results for their clients. Still, I just don't see the need for these guys.
I like the concept of the magic formula, investing in cheap companies that have high returns on capital is an excellent idea, and I definitely think that it has some value as a stock screen. However, one thing that bugs me about it is...and correct me if I'm wrong because I heard this in an interview with Greenblatt this morning, that the formula has only been back-tested using a decade's worth of data. Is that true? If so, it's hard to believe. In today's day and age would it really be that difficult to back-test it for four or five times that long? Perhaps they did and the results didn't look that great. I would be hesitant to use any investing methodology that assumes what we have experienced over the past decade is a normal stock market or economy.
I personally think that using Formula Investing as a money management firm is a complete waste of money, but I'd love to hear others' thoughts on this money management firm. Convince me that I'm wrong.