What is MagicDiligence?
This is a "hybrid" CAPS portfolio. Stocks are chosen by the the following screen:
1) Top 25-50 Magic Formula stock in it's market cap class. I use two classes - 50m and above (all stocks), and 2b and above (mid/large caps).
2) Pays a dividend.
3) Passes reasonable due diligence by me. Since many Magic Formula stocks are one-hit wonders, or due to one-time gains, or in difficult financial shape, I personally review each pick before adding it. The idea is to get a list of the best Magic Formula stocks and throw out the junk.
I will hold each stock for at least one year. If, at the end of the year, the stock still passes the above 3 tests, I will hold it another year. If it does not, I'll end the pick.
The strategy is to try and use Greenblatt's Magic Formula as an initial screen for finding good companies at cheap prices. Then, as outlined in his book, buy and hold the best of those ideas.
The reason for the dividend stipulation is to cut down on risk. Dividend payers in general have more stable cash flows and are less likely to be one-hit wonders or one-time gain recipients.