What works on Wall Street, Magic Formula

[Fran8]

Quote:
Originally Posted by luckyd1976
Market Caps 25mil-250mil (I love this space too)
PSR < 1
Sort by 1 yr RS
Top companies (25-50 portfilio)



I have read many books and many of them use similar characteristics for selecting stocks, for instance in Peter Lynch book One up on Wall Street he's tennbaggers have similar characteristic, another book that I like and invest using exacly that characteristics is Midas Investing but instead of using price to sales ratio they use PEG ratio to find that they are undervalue

 

[Straddle8]

Quote:
Originally Posted by luckyd1976
Market Caps 25mil-250mil (I love this space too)
PSR < 1
Sort by 1 yr RS
Top companies (25-50 portfilio)

I have read many books and many of them use similar characteristics for selecting stocks, for instance in Peter Lynch book One up on Wall Street he's tennbaggers have similar characteristic, another book that I like and invest using exacly that characteristics is Midas Investing but instead of using price to sales ratio they use PEG ratio to find that they are undervalue

You can backtest all those strategies on this website:

http://www.backtest.org/

This strategy:
(Market Caps 25mil-250mil (I love this space too)
PSR < 1
Sort by 1 yr RS
Top companies (25-50 portfilio)

Would have returned a 137% return in 2009.

 

[luckyd1976]

You can backtest all those strategies on this website:

http://www.backtest.org/

This strategy:
(Market Caps 25mil-250mil (I love this space too)
PSR < 1
Sort by 1 yr RS
Top companies (25-50 portfilio)

Would have returned a 137% return in 2009.

Did you do a rolling ReAllocation 25-50 Or once a year backtested from Jan 5th, 09?
I always like a new toy to play with, Thanks for the link...

 

[DionysusToast]

Paul

This will really blow your mind - the Amazon book review site reveals it:

Amazon.com: The Little Book That Beats the Market (Little Books. Big Profits): Joel Greenblatt: Books

The rationale is straightforward: buy shares in good businesses, measured by returns on capital, only when they're available at bargain prices, defined as a high earnings yield.

Well it worked for Warren Buffet

Charlton

Warren Buffet buys controlling interest in companies, not 100 shares.

Therefore, following Buffet is not a realistic proposition for most of us who have less than a billion to invest. :whistling

 

[Fran8]

Warren Buffet buys controlling interest in companies, not 100 shares.

Therefore, following Buffet is not a realistic proposition for most of us who have less than a billion to invest. :whistling

I completely agree, I think that during the years that he was running the partnership he was using the strategies that we are able to use today, he was a value investors and many times he did not even hold the stocks for a year he sold them the soon as they were priced correctly.

Since he bought Bershire in my opinion he stop being a stock investor and became more like a venture capitalist and not just a stock investors that get the maximum for a stock and then sell it like even the long term investors do whether they are value or growth investors, he is buying companies for his business.

 

[luckyd1976]

Warren Buffet buys controlling interest in companies, not 100 shares.

Therefore, following Buffet is not a realistic proposition for most of us who have less than a billion to invest. :whistling

Absolutely. It's not like we can call GS directly and Ask for a 10% Preferred Stock. And his Dollar Cost averaging is higher than some Emerging Markets.

I completely agree, I think that during the years that he was running the partnership he was using the strategies that we are able to use today, he was a value investors and many times he did not even hold the stocks for a year he sold them the soon as they were priced correctly.

Since he bought Bershire in my opinion he stop being a stock investor and became more like a venture capitalist and not just a stock investors that get the maximum for a stock and then sell it like even the long term investors do whether they are value or growth investors, he is buying companies for his business.

The genius of Buffett is in his buying of companies. By buying the Privates he can usually get them for 3-5 times Earnings and roll them into his umbrella of his 13x earnings. Instant earings jump and most of his deals come to him now. Private companies that have no buyers (because they are so huge) call him and want to share in the legacy with Warren.

 

[DionysusToast]

Absolutely. It's not like we can call GS directly and Ask for a 10% Preferred Stock. And his Dollar Cost averaging is higher than some Emerging Markets.

You could ask - they might tell you to fluck off though...

 

[Straddle8]

Did you do a rolling ReAllocation 25-50 Or once a year backtested from Jan 5th, 09?
I always like a new toy to play with, Thanks for the link...

This backtest was done without re-allocation. I'll see if I can make the same backtest with re-allocation. I guess you can do the backtest both ways, considering how you would trade out of sample.

The only disadvantage is that the backtest doesn't shows you which stocks to buy. You'll have to get a Value Line membership.

 

[luckyd1976]

The only disadvantage is that the backtest doesn't shows you which stocks to buy. You'll have to get a Value Line membership.

Speaking of Buffett and Valueline. "Trouncing the Dow" by Kenneth Lee lays out a great LongTerm Value Strategy he calls the Buffett Benchmark, using the ValueLine Survey.

How much does the Survey cost?

 

[Henryatkin]

I've read a lot of investment & trading books by Graham, O'Shaughnessy, Greenblatt, Zweig, Piotroski, et al. Its a shame that Templeton didn't write a good trading book towards the end of his life. Essentially all the books make sense and adopt fairly simple strategies but its often not that easy to finish a book and decide how to go about putting the stock selection into practice. I found the answer was to use stock screening which allows you to backtest and modify the screen to obtain a realistic number of stocks to hold in a portfolio. I'm UK based so I use Sharelockholmes for for my UK stock screens and AAII for my US stock screens:
http://www.sharelockholmes.com/queryedit.aspx
http://www.aaii.com/stock-screens

AAII is good in that it shows actual 3year, 5year and 10 year performance (excludes costs).
Sharelockholmes is good in that you can modify the screens very easily and manually backtest. I was quickly able to build my own John Templeton screener.

My preferred choice of stock trading is small companies value and growth so I screen Jim Slaters Zulu principles and O'Shaughnessy's Cornerstone (I have modified it to add projected minimun 20% eps growth). I also regularly check the others for pure momentum growth opportunities and Greenblatt type value plays. I don't trade every stock from the screener selections but do a bit of additional research. There's often a good reason for a share price to be low and some growth stocks get way overvalued for my preference. All my stock trades are held on technical analysis exit and entry levels. I also follow Martin Zweigs economic 'Sell Everything' filter. My actual performance is very similar to AAII figures. Last year April-April was a gain of 42% after costs & spreads - thats over 10% above my normal so may well be a lot lower this year.
I believe all the strategies of the master investors work. Zweigs Winning on Wall street is a classic for combining momentum and monetary indicators. Well worth reading for his exit strategy alone.

 

[nunrgguy]

Warren Buffet buys controlling interest in companies, not 100 shares.

Therefore, following Buffet is not a realistic proposition for most of us who have less than a billion to invest. :whistling

I think he sells a fair bit of insurance too

 

[cr6196]

yes, the "magic formula" works, i can't remember the exact returns but it is high teens with a beta under 0.5. If your interested, you can actually just use EBIT/EV as adding ROC doesn't actually add that much to returns. The best screener for this is either: www.screener.co where you can set it up yourself or there is an automatic one here: http://blog.empiricalfinancellc.com/empirical-finance-data/

btw, i think a lot of people here are misunderstanding (which is money in the pocket of people who use this strat), this isn't a "magic formula", this will underperform for 3-5 years at a time, like most good PMs, but will average out. it requires a level of patience that most people here will never have. more specifically, this will underperform in "good markets" and outperform in "bad markets" which is where you make money.

 

[Henryatkin]

yes, the "magic formula" works, i can't remember the exact returns but it is high teens with a beta under 0.5. If your interested, you can actually just use EBIT/EV as adding ROC doesn't actually add that much to returns. The best screener for this is either: www.screener.co where you can set it up yourself or there is an automatic one here: http://blog.empiricalfinancellc.com/empirical-finance-data/

btw, i think a lot of people here are misunderstanding (which is money in the pocket of people who use this strat), this isn't a "magic formula", this will underperform for 3-5 years at a time, like most good PMs, but will average out. it requires a level of patience that most people here will never have. more specifically, this will underperform in "good markets" and outperform in "bad markets" which is where you make money.

I think a lot of people would also do well to consider analysing the risk adjusted return of a strategy. The highest average absolute return may present very large drawdowns as well as the number of losing years. One needs to consider researching the use of Sharp Ratio's and standard deviation before deciding upon what strategy to use. O'Shaughnessy describes this well in What Works on Wall street chapter 21 - ranking strategies. For example O'Shaughnessy reduces his risk by adding a proportion of high dividend yielding large caps to the portfolio.
Thanks for the screener links.

 

[cr6196]

I think a lot of people would also do well to consider analysing the risk adjusted return of a strategy. The highest average absolute return may present very large drawdowns as well as the number of losing years. One needs to consider researching the use of Sharp Ratio's and standard deviation before deciding upon what strategy to use. O'Shaughnessy describes this well in What Works on Wall street chapter 21 - ranking strategies. For example O'Shaughnessy reduces his risk by adding a proportion of high dividend yielding large caps to the portfolio.
Thanks for the screener links.

...thats why I referenced beta...one can achieve similar returns to the Magic Formula, sorting by ROA but the beta is usually above 1 (for obvious reasons). Using enterprise value and profit before interest expense (and to a lesser extent, ROC) is the centerpiece of how this strategy reduces risk.

 

[Fran8]

I have seen in this article that using ROA is better than using ROC http://www.gurufocus.com/news/1427/the-joel-greenblatt-way--grow-rich-not-trying-very-hard

Anyway many people use the list to screen the market, pick the 50 top magic formula stocks and then use it to select stocks from that list, is more Greenbalt says that he achieve the 40% over a decade in his Hedge Fund doing that.

Which other criteria you guys think are important to achieve those returns?