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Magic hat blog
The MHP (Magic Hat Portfolio) on Stockopedia (http://www.stockopedia.com/fantasy-funds/magic-hat-463/) is an experiment by me to see if a human can improve on a mechanical Greeblatt Magic Formula screen. I am trying to weed out "mistakes" that I feel the screening commits: unseasoned companies, scams, foreign companies (particularly Chinese), fishy accounting, and statistical quirks. Apart from that, I am agnostic as to the sector the company operates in, although I will try to avoid heavy concentration in any one sector. I will mostly apply "Strategic Ignorance", by which I mean that I wont try to be clever in my stockpicking. My picking will be mostly mechanical. A summary of most of my Magic Hat articles can be found on the web page http://www.markcarter.me.uk/money/greenblatt.htm This will allow you to see, at a glance, what shares have been bought and sold in the past, as well as what shares have been rejected from consideration and why.
2017-09-05 HVN stays in
2017-08-07 FXPO in, IBST out
2017-07-05 LSL in, MCGN out
2017-06-05 EPWN in, KCOM out
2017-05-04 WIN stays in
2017-04-05 RM. stays in
2017-03-06 DFS in, IHG out
2017-02-06 STY in, LAM out
2017-01-05 XLM in, ERM out
2016-12-06 DTG stays in
2016-11-07 SOM in, GSK out
2016-10-05 CCT stays in
2016-09-08 HVN in, CRE out
2016-08-06 IBST in, AIR out
2016-07-06 MCGN stays in. I was on holiday, so there is no blog article for this month
2016-06-06 KCOM in, QRT out
2016-05-06 WIN stays in
2016-04-05 RM stays in
2016-03-07 IHG in, FLYB+PRES out
2016-02-01 LAM increased, SHOS sold, DTG reduced
2016-01-05 ERM in, KAZ+INDV out, DTG trimmed
2015-12-04 DTG stays in
2015-11-05 GSK in, ITE out
2015-10-05 CCT in, LRM out
2015-09-03 CRE in, CNCT out
2015-08-05 AIR in, NPT out
2015-07-02 MCGN in, XCH out
2015-06-03 QRT in, HNT out
2015-05-05 WIN stays in
2015-04-13 RM stays in
2015-03-05 FLYB+PRES in, IRV out
2015-02-04 LAM+SHOS in, REDD out
2015-01-06 KAZ+INDV in, DGO out
2014-11-05 ITE in, Median EY: 16.5%. Rejected: JSI Chinese
2014-10-06 LRM in, SMWH out. Median EY: 20.5%
2014-09-05 CNCT in. BSY out. median EY: 17.1%
NPT in. Median EY: 18%.
2014-07-05 WIN in, RB out. Rejected: CTEK Chinese, INM anomalous, RMG anomalous, QPP fishy.
2014-06-06 HNT in, IMT out.
2014-05-06 XCH in, MJW out.
2014-04-07 RM in, MRW out. Rejected: FLYB anomalous
2014-03-05 IRV in, BA out.
05-Oct-2012 Lecture notes
A good business has high returns on tangible capital (after-tax EBITA/(net PP&E + W/c)) i.e. ROTC well above 10%.
Greenblatt looks for where upside is 5X downside - big potential gains, limited losses. Fore example, price is 40, downside is 35, upside is 65+ (down 5, up 25). Focus on best opportunities - only own 5-8 stocks at one time, and hold for 1-5 years, i.e. only invests in one or two stocks per year.
Be patient. He seldom adds to positions if they decline - buy right first time, because there are no do-overs.
Valueprax's Review of Quantitative Value
Valueprax presents a review of the book that tries to improve on the Magic Formula.
- Any sample of high-return stocks will contain a few stocks with genuine franchises but consist mostly of stocks at the peak of their business cycle... mean reversion is faster when it is further from its mean
- the simplest form of the enterprise multiple (the EBIT variation) is superior to alternative price ratios
- trading on opportunistic insider buys and sells generates around 8 percent market-beating return per year. Trading on routine insider buys and sells generates no additional return
- short money is smart money... short sellers are able to identify overvalued stocks to sell and also seem adept at avoiding undervalued stocks
- Collecting more and more information about a stock will not improve the accuracy of our decision to buy or not as much as it will increase our confidence about the decision... keep the strategy austere
- the Magic Formula underperformed its price metric, the EBIT enterprise multiple... ROC actually detracts from the Magic Formula's performance. the quality measures don't warrant as much weight as the price ratio because they are ephemeral. Why pay up for something that's just about to evaporate back to the mean?
- the QV strategy compared favorably in a number of important metrics and was superior in terms of CAGR with vaunted value funds such as Sequoia, Legg Mason and Third Avenue.
Links to other sites
Columbia University Videos - series of 6 videos from 2005/6 (Alternative link)
and Doddsville - my synopsis of of Greenblatt's comments on the
newsletter published around Oct 2012.
How to beat the Magic Formula Article on Greenbackd. Added 18-Dec-2012
Author: Mark Carter