Just over six years ago I began my noble experiment: following Joel Greenblatt’s Magic Formula strategy laid on in his bestselling book “The Little Book that Beats the Market”. My enthusiasm waned slowly but steadily during those years as the outperformance the Book touts never happened. The ride was not tumultuous – my portfolio consistently underperformed. Here’s where it ends up: My total portfolio is now (as of April 11, 2023) valued at $73,810, or a total gain of just under 23% on my original investment of $60,052. Well, I didn’t lose money, but during that same time the S&P 500 (SPY) is up over 77% not including dividends. Here are the stocks still in my portfolio:
If you have an eye for detail you may notice that I have only 29 stocks here. Where’s the 30th? And what’s with over $2,000 in cash? One of the many facets of following this formula is that you’re supposed to invest equal amounts in each stock. 1/30 of the total amount of the portfolio is around $2,450. When I sold shares of Korn Ferry (KFY) on 3/29/23, which was a loser, I didn’t have enough dough in the account to make up that last stock. In fact, I’ve been running one stock behind for a while now. The next sale I’ll make very soon will be Sturm Ruger (RGR), also a loser. If I were still following the formula, after selling RGR I’d have enough to make another purchase but I’d still be one stock behind until, hopefully, I’d be able to catch up in June with the sale of Assertio (ASRT) which has been a big winner.
This balancing of the portfolio is just one of many small factors of following this strategy. I’ve described many such nuances over the years if you care to read my previous posts. That’s fine; I don’t mind the overhead. If this strategy actually worked these types of things would be a small price to pay. The problem is it’s not working.
Why I’m Bailing out Now
In Greenblatt’s Book, he claims that in his back-testing, every one of his test portfolios out-performed the S&P 500 over five years, so I wanted to give the strategy at least that long. And now after six years of both bull and bear markets, I want to give some final thoughts on the experience. I’ve already touched on most of these things in my blog posts over the years.
I simply don’t trust that Greenblatt’s formula works, even over the long term. Joel Greenblatt co-runs Gotham Funds. You’d think that if he believed in his own strategy he’d have one fund that follows the Formula described in his book. I believe he used to but it was discontinued. It’s also suspicious to me how Greenblatt never states what he did in situations such as when a stock that’s due for sale is still on the screener as one of the top 30 stocks. He says we must decide whether to buy a different one or retain that stock, but he never writes what he did when computing the returns reported in his book. Many such details are absent in the book, which throws his claims into question. I’ve had quite a few people write to me over the last six years, and some were quite knowledgeable about The Book. Not one reader in that time has claimed to have beaten the market following Greenblatt’s Magic Formula strategy.
I’m tired of buying shares of junk companies, and companies I hate. Since Greenblatt’s book isn’t clear on how to pick stocks using his screener – he just says to pick between 20 and 30 – I at first would do a tiny amount of research before investing, and avoid stocks like for-profit universities and gun manufacturers whose business I don’t really like. Then I realized that my own biases might be contributing to the portfolio’s under-performance, so I decided to randomly choose my MF stocks using Greenblatt’s screener. This didn’t help matters. I bought a lot of shares of doomed biotech companies, Sturm and Ruger, Tupperware, Perdoceo (which I believe is Spanish for “lose everything”) while people who simply bought an index fund did way better.
Ok, I’m done for now. There will be more articles here related to the Magic Formula, and other formulas. Take care, do good work, and keep in touch!
andrew
andrea baker says
i have enjoyed reading your experience. I came across your blog a few years ago. Your understandably done, but if you want to do something like this again you might be interestedi checking out https://acquirersmultiple.com/. thanks!
Andrew says
Hello Andrea,
You’re not the first reader to mention that book. I do plan to read it but I’m a little wary because I’ve read about it a bit, and I think one way it’s similar is that the author has his own screener that he encourages everyone to use, right? I decided I’m not going to follow a strategy like that again where you’re dependent on somebody’s proprietary screener, where they sort of tell you how it works and claim that if you use it you’ll see huge returns. But I’m curious enough that I’ll at least read it.
Thanks!
andrew
Quant Compounder says
Really enjoyed following your blog Andrew and your reasons for calling it a day are understandable.
It’s been about a year and a half since I started my Magic Formula experiment and share a lot of your views in this post.
Looking forward to comparing results in Y5!
Andrew says
Hi Quant,
Sorry for the lateness of my reply – I just noticed this. Yes, let me know how it goes for you, and please let me know how your approach differs from mine.
Take care,
andrew
Peter.D says
Thank you again Andrew for this update.
Very understandable that you are going to ditch the magic formula.
Thank you for sharing your adventure with us,
I am curious to hear what kind of strategy you are going to follow next!
(Why not just go for ETF strategy and follow S&P 500, Nasdaq 100 indexes. ?)
Keep up the good work! Cheers!
Andrew says
Hi Peter,
My first investing strategy, going back to the late ’90s, is exactly what you describe. I started with Vanguard’s S&P 500 index fund, and I ended up with Vanguard’s VTSAX, which I highly recommend. Indexing has been the core for me, and still is, especially in the 401k. Then I got greedy during the Great Recession, which was a good time to be greedy. Thanks to Motley Fool I started investing in individual stocks. That evolved into dividend Growth Investing, which I’ve been doing for the last 8 years or so, investing in stable companies that make money, pay growing dividends, and seem to be undervalued. But I’m always on the lookout for more info and new schemes. I will be posting more here, though I certainly will not be starting another Magic Formula Portfolio!
Thanks for reading!
andrew
David says
An interesting read. One thing I don’t understand however, did you simply buy 30 stocks at the beginning of each year or did you purchase 2-3 stocks per month, or 5-7 stocks per quarter as recommended by Greenblatt?
Andrew says
Hi David,
I spread it out over months. Also, it’s inevitable that once in a while a company you’ve invested in will get bought during the year (though Greenblatt never mentions this, or what to do about it), so you’ll end up replacing some of the stocks at unexpected times.
Thanks,
andrew
Joe says
Hey Andrew,
It’s interesting to see someone take a leap of faith and follow Greenblatt’s MF. I also read his book but decided not to follow his MF strategy, only because it makes more sense to me that one should invest in what he understands and over time he/she should do pretty well in the long run vs the avg market returns. In Mohnish Pabrai’s book The Dhando Investor also mentions Greenblatt’s MF but i think towards the end of the book he stated that it may instead be used as a one of the many sources to research potential companies worth investing in. The fact that you sticked to the MF for 6 years i think it proves you have the patience and consistency mindset of being a value investor.
All the best!
Andrew says
Hi Joe,
That’s funny that you write “it’s interesting to see someone take a leap of faith and follow Greenblatt’s MF”, because after I read the book I thought, “how could anybody read this book and not try this?” I guess there’s a sucker born every minute. Thanks for the compliment on sticking to the MF for over 6 years. I did wrestle with the decision, but I had other ideas for deploying this capital and I kept asking myself, “how long am I going to give this? 10 years? 15?
take care,
andrew
Marshall says
Hey Andrew,
Just wanted to say thanks for doing your blog for so long. It’s been an interesting read, and I appreciate your frankness and thoroughness.
I think your blog is a valuable thing; there aren’t many things like this that document following a strategy so thoroughly.
Personally, I think the Magic Formula (and other formula-driven strategies like it) can work for a while, but then the market/economy changes, and it stops working. That’s what happens in the stock market. It just so happened that starting around 2013-2015, we had a market where big companies with market power (especially the tech companies, like the FANGAM stocks) really started to dominate. So, instead of following the Magic Formula, if someone had the foresight to switch to a market-power FANGAM strategy, that would have been the one that beat the market.
So, the market changed, and the Magic Formula stopped working. I also suspect it may work again at some point in the future, but who knows when that will be.
Anyway, thanks for the blog.
Andrew says
Hi Marshall,
That means a lot to me. The reason I started this is because, even though the Little Book was a big best-seller, I couldn’t find any blogs or sites where people gave testimonials on their real-world experience with the MF. That should have tipped me off, since the Book had already been out for twelve years or so! By the way, a number of readers have recommended another strategy called the Acquirer’s Multiple. I wonder if there are any sites like mine for that scam, I mean strategy!
Thanks for reading! Please check back – I’m going to try to do something else with this blog.
Riley says
That’s interesting, Andrew, and thank for toughing it out for 6 years. It’s really frustrating you underperformed over the 5+ year period that Greenblatt referenced.
Was “this time different?” Hard to say…
What’s interesting to me, just picking a date at random… if you started from, say, Portfolio Update 12/13/2020 ($59,636.80 portfolio value; SPY $366.3) to your last Final Portfolio Update! 04/17/2023… by my math your Portfolio ($73,810.41) would’ve gained 24% vs 13% for the SPY ($413.94, not including dividends.
This is just one date vs another though.
Andrew says
Hi Riley,
I’m sure there were periods where my Portfolio outperformed the S&P during that 6+ years, but what matters is the total performance over time. Maybe I was just really unlucky, but I don’t think so. If you look at the stocks that show up on MagicFormulaInvesting.com, you’ll notice many of the same ones stay on there year after year – way more stickiness than I would have thought. Stock prices fluctuate wildly every trading day, yet companies like HP and Perdoceo, and GoPro, etc. stay on the screener for years. My point is that maybe I was just unlucky, but I’d bet that most people that try this strategy are going to have a similar experience because they’re going to be buying the same stocks that I bought.
Thanks for commenting!
andrew
Bart says
Hi,
I did some experiments with MF myself, few years ago. I used monthly rebalancing and a portfolio of less than 20 stocks (I think it was even closer to 10-12 than 20) and must say that the results were NOT satisfactory… unless I introduced few improvements that improved the performance dramatically:
1) I added 6-month momentum criteria (bought only uptrending stocks)
2) I added Stop Loss criteria (around 10-15%)
You may give it a try!
Regards
Andrew says
Hi Bart,
Those are some interesting changes, especially the stop loss. You’re not the first person to suggest changes to the MF to try to improve it. Usually the improvements involve excluding certain stocks on the screener, like pharmaceuticals. I especially like your stop loss idea. Please check back in and give us an update on how your improvements are working!
Take care,
andrew