Value Investing Pro

First of all, its quite obvious the magic formula investing strategy has its flaws. For example, a bunch of bio-techs with one products will appear on the screen every week or two. A recent trend has been Chinese companies with cooked up books or who have missed analyst expectations. Once magic formula investors figured this out, they thought they could analyze the screen on a weekly basis and choose the best stocks. In theory that should work. But as we all know, theory and practice don’t always hold hands. I will use myself as proof. Now, I consider myself a pretty good stock picker(see below).

I have been value investing for about 6 years and if there is one thing I have learned over the years is that to outperform you have to be VERY patient as bargains rarely come around. Seriously, if you see any blogger/persona/journalist, etc…  recommend stocks in every post, chances are they are pulling names out of a hat, in other words, their full of it.  Consider this, the magic formula investing systems screens for great companies selling at cheap prices. No secret there, but even though it screens for cheap prices, I have found about 3 undervalued stocks in the past 4 months. So if I screen for “cheap” every week, and I have found all but 4 undervalued stocks,  how on Earth is someone finding undervalued stocks on a daily/weekly basis?  The other thing I have learned is while value investing is simple, its definitely not easy. It takes a bunch of reading and analysis to truly understand a company and then you have to pray to the gods that its undervalued, something that happens in these kind of markets.

Then comes the curveball, the magic formula doesn’t work at all times. Yikes!!! what does an investor do? a) stick with the system b) keep it automated. Yup, don’t try to pick the winners. Stick with the magic formula system as it is laid out in the “little book”. I have been pretty inactive in the past month or two. Part of it is due to school. The other half is due to business. So considering my time is constrained, I went fully automated and cringed at the thought of buying bio-techs and unknown Chinese companies. But there’s an upside to this automated system. First, the magic formula doesn’t work at all times. Secondly, you have to accept the fact that these magic formula stocks are cheap for a reason, very rarely will you find a Bentley in a sea of Toyota’s. Third,  and probably the most overlooked, what might be a dog, could very well be a tiger. By that I mean, that stupid bio-tech that you bought with your eyes closed, could double in the next year as it goes through legal issues, new products,etc… How do I know? I have seen hundreds of companies go though the magic formula system. What looked like a bargain became a stock to forget, and what looked like a dud turned out to be gold. Don’t believe me, check out my automated magic formula fund (results below). I screen for it every month following the rules as they’re laid out in the book.  I buy,sell ,repeat and that’s all I do. I can’t complain about the magic formula results.

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