The Stickiness of Formula Stocks

I am now in the third round of choosing my Magic Formula Stocks. The first round started in late December 2016, when I bought thirty Magic Formula stocks over a period of a couple months. Around the same time last year I began the process of selling all those stocks and replacing them with other stocks as identified on MagicFormulaInvesting.com. Now here I am again, still happy to share my experience, but becoming pessimistic about the overall strategy, which has not performed well for me. One of the growing concerns I have on using Mr. Greenblatt’s site is what I call the “stickiness” of the stocks identified on MagicFormulaInvesting.com. In short, many of the same stocks tend to stay on the list for years.

One of the concepts of The Little Book That Beats the Market is that the website helps you identify these stocks of good companies that the market has undervalued. You buy the stocks, they escalate in market value over the year, most likely disappearing from the list, then you sell them, replacing them with another set of undervalued stocks from the current list. But what if one of the current stocks is still on the list? The guidance from The Book and the website is “Sometimes a previously owned stock will remain on the list and then you must decide if you want to continue to hold this stock”.

Okay, but how do we decide? Flip a coin? I quickly found out that this is not a rare occurrence. Here is a screen shot of the thirty stocks listed on MagicFormulaInvesting.com on 12/28/2018:

The red dots on the left designate stocks that I currently own or previously owned since the start of my Magic Formula Experience. That’s sixteen companies; over half the current list! I also see BPT on there, and it has been on the list for nearly the entire time I’ve been doing this, but I’ll never buy it for reasons I’ve discussed in another post. Choose 50 stocks instead of 30 and you’ll find more stocks that I’ve previously owned or currently own. What does it mean when you keep seeing the same companies on this list year after year? You might begin to think that either the strategy doesn’t work or that something is wrong with the logic that updates the list. But every time I’ve looked into one of these companies’ fundamentals it always passes the sanity check: a very low P/E Ratio and a high Return on Assets.

Going forward, my basic strategy will be to keep a stock that I currently own that is still on the list IF it has been profitable, but… hey, I can’t honestly justify any strategy to deal with this issue — can you?