# Magic Formula on the ASX



## systematic (7 July 2015)

As a change from the tiny, illiquid, unprofitable companies in the NCAV thread, but still in keeping with the theme of value based investing, I thought I'd take a look at the magic formula on the ASX.  This is the well known method from, "The Little Book that Beats the Market" by Joel Greenblatt.  There's a brief wikipedia article with the details, if you are not familiar.

I post the top 10 rather than the top 30 or 50 as Greenblatt really sticks to the top few percentiles - and the ASX is a much smaller universe of stocks to select from.

Currently, I get:




What's your analysis of any of the stocks in this list?

My initial comment:  at least you don't just get a bunch of mining stocks (as you do with the NCAV and some other singular value measures).  For interest, the next 5 contain both Nine Entertainment and Southern Cross, so there's at least a little bit of an emphasis on media stocks at the moment.


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## sinner (7 July 2015)

Thereis an excellent bunch of writing about the Magic Formula in "Quantitative Value", I recommend reading it, if you are relying on the Magic Formula!

The main issue with this methodology is that it ranks value and quality equally, which generally results in portfolios that overpay for quality.

A better solution (and that adopted by the authors of Quantitative Value) is to split the universe into deciles based on EBIT/TEV, select the value decile and then split your selection into high quality and low quality halves.

The returns on High Quality Value are better than Low Quality Value, Value and Magic Formula.

Here are all the analysis on Magic Formula done by the QVAL guys: http://blog.alphaarchitect.com/tag/magic-formula/

The book also has some really interesting observations (not necessarily negative) about this methodology and the general issue of mistaking the ceiling of a methodology for its floor.


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## systematic (7 July 2015)

sinner said:


> Thereis an excellent bunch of writing about the Magic Formula in "Quantitative Value", I recommend reading it, if you are relying on the Magic Formula!
> 
> The main issue with this methodology is that it ranks value and quality equally, which generally results in portfolios that overpay for quality.
> 
> ...





Thanks sinner, I'm familiar with that work, and prior to the QV book coming out had concluded that you are better off with value first, then quality, as opposed to an equal split (you could see that from looking at Novy-Marx' data, which one of the co-authors of QV mentioned at the time as well).  That's _if_ you're using quality at all.  I've previously mentioned that I'm quietly cautious on quality for several reasons - one of the co-authors of the QV book doesn't like to use it at all.  

I was crook as a dog the other day and grabbed "The Little Book that Beats the Market" off the shelf for a quick read in bed with a cuppa (Greenblatt has a very entertaining writing style)...and that's what reminded me of this approach.  
They (NCAV, MF, QV etc) are not my investment plan, as it were - I just find looking at stuff to be fun.  

In my view, at the end of the day they are slightly different approaches that will produce slightly different numbers.  Most of these things are variations on a theme, to various degrees.  Any quality measure combined with any value measure (equal weighted)  gives you an MF type of approach (e.g. Price to Book with Gross Profits to Assets).  Or, for example, the Piotroski approach written about 13 years ago (quintile on P/B first, then a top F Score) is the exact same theme going on with QV.  And, in fact, compares quite favourably with the more complex QV.

I've had different views (as we all do, as we keep thinking about these things).  It all depends on what the investor is trying to achieve.  For example:  some investors might like to _start_ with 'quality' (however they define it).  They might find a quantitative sort on quality measures to be an initial, very useful cull of the market...to then go on and do their own intrinsic value calcs on.  Certainly not _my _approach - but entirely valid.  Greenblatt talks about this in relation to the Magic Formula (and apparently it's what he actually did / does in his funds).  It depends what the investor is trying to achieve (which of course, is not always the highest CAGR, as much as we'd like it).

Anyway, it's all food for thought and I really appreciate the input.  I also completely agree with you that QV is a wonderful summary of - just that: a quantitative approach to value, and I regard the work extremely highly, as you obviously do.  As a matter of fact, I started putting it together on the ASX a couple years back and then abandoned it.  Might have to look at it again sometime.


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## sinner (7 July 2015)

Awesome post, systematic, it's obvious my cautionary note was not required for you!

I also noticed how well the Piotroski/FS_SCORE + P/B value decile performed (I posted this link in another thread recently but it's even more relevant here) http://blog.alphaarchitect.com/2015...ple-methods-to-improve-the-piotroski-f-score/ with CAGR and maxDD approaching that of QV for a lot less effort. 

Thanks for reminding me about this as I had some research to do on P/B based on this regression model which works off P/B and RoE, which for me was a completely different way of looking at the same data http://epchan.blogspot.com.au/2014/02/fundamental-factors-revisited-with.html .

I had also considered setting up QVAL portfolio for the ASX, same as you, but in the end I didn't mostly because there is something about the logits used in the book which rubs me the wrong way (same reason I don't like Altman z score). So in the end I adopted a much simpler model (read, robust) influenced by the work of Eric Falkensteins DefProb (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1103404) to replace the logits and use that as part of my ASX portfolio selection.


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## ThirtysixD (10 September 2015)

Nice to see some people with similar thoughts!

Most of my research has shown that roe outperforms roic (roce also beats roic for that matter). I think quality tends to mean revert so filtering according to value is more important. Instead of ranking on quality using a straight roe > 0 filter will work just as well if not better. However this can be problematic on the asx since we are not very well diversified.

I am currently holding 3 of your stocks from your list - but I tend to focus on small caps on the asx (less efficiently priced and room to grow). I think there are several stocks that would rank higher than those listed so im curious about where you are getting your data from?

What I have been thinking about recently is front running these quantitative investing funds. Most of their strategies are fairly simple and if they were to ever get a decent amount of assets under management you would only need to figure out the holding period to pick them off.


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## sinner (10 September 2015)

ThirtysixD said:


> What I have been thinking about recently is front running these quantitative investing funds. Most of their strategies are fairly simple and if they were to ever get a decent amount of assets under management you would only need to figure out the holding period to pick them off.




I'm not sure what  the point of that is exactly, feel free to enlighten me!

I'm an investor because it's the optimal method for me, all the turnover is handled inside the funds! But if anything, I wish they had a longer holding period, more like allocate 20% of capital each to 5 portfolios (generating a new one and dropping the oldest each year) with 5 year holding period.


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## DeepState (10 September 2015)

Given mention of Novy-Marx, various profitability measures, Piotrosky and interaction with value....

Might be worth reviewing this:

http://www.researchaffiliates.com/O...s/259_The_Moneyball_of_Quality_Investing.aspx


Of note, these guys reckon there is no premium to quality in a univariate sense.  Further, the quality measures which are presently popular are likely data snooped.  However, they seem to think that conditioning value by quality produces good stuff.  ... Which suggests there is mispricing of value stocks that can be picked up via quality metrics.  



Asness finds that Quality Minus Junk does produce a premium.

Arnott (of RAFI: Research Affiliates Fundamental Index per above) and Asness used to be good buddies, but not any more. 

This thread is fantastic.  It is a treat to find highly data rational people coalescing. 

Question: Do you think that Quant managers and those with the simple resources to replicate these measures in a day or two, who read this research and more, will not be front running you as you try to front run them?  I express some skepticism when there is an argument based on non-linear interaction and mispricing is asserted.


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## tinhat (11 September 2015)

systematic said:


> Currently, I get:
> 
> View attachment 63312
> 
> ...




Most of those stocks are in a serious down trend. This may indicate the problem with associating a stock's market price (which is the market's forward looking assessment of the company) with a company's past performance, which is what equity yield does.


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## systematic (11 September 2015)

tinhat said:


> Most of those stocks are in a serious down trend. This may indicate the problem with associating a stock's market price (which is the market's forward looking assessment of the company) with a company's past performance, which is what equity yield does.




a) I doubt it.  It's only been two months (the MF holding period is one year).  Regardless, the portfolio is down 4.5% whilst the all ords is down 8%.

b) The MF uses an earnings yield, not an equity yield just out of interest.  But to your point re: a company's past performance...what else is there?  No one has a company's future performance, so the only other alternative would be to be, "forward looking" (as you put it) with the company's performance.  Well that's just another topic altogether, and a dangerous road to travel, in my opinion.  That domain is for super investors, not people like me.  Of course, some pull it off (Buffett, ASF's own, craft).  I can't punt on myself being that good.


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## systematic (11 September 2015)

DeepState said:


> Of note, these guys reckon there is no premium to quality in a univariate sense.  Further, the quality measures which are presently popular are likely data snooped.  However, they seem to think that conditioning value by quality produces good stuff.  ... Which suggests there is mispricing of value stocks that can be picked up via quality metrics.





I agree, there's so much data snooping going on with the latest and greatest factors.  My take on quality thus far has been to ignore it (due to similar sentiment as above).  The only use for quality that I see is in picking up genuine bargains, or mispricings, as you mention (value first, then quality).  It just makes sense, there's data to show it, and I'm all for reducing volatility a little.  So, I've been looking at it a bit...but even then I still remain cautious - as I lean a little more toward the school of thought that says: any factor you decide to include in your model, should be a stand-alone factor.  Actually, Novy-Marx just recently had a paper on exactly that.  I'm still definitely undecided at the moment whether to include it, so it sits on the sidelines for now - although I look at it a lot.


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## sinner (11 September 2015)

DeepState said:


> Given mention of Novy-Marx, various profitability measures, Piotrosky and interaction with value....
> 
> Might be worth reviewing this:
> 
> ...




The main goal for me when applying quality measures is to avoid value traps. 

I agree about the quality issues you mentioned re snooping and lack of premium. My main concern is the introduction of a variable highly influenced by cyclical factors. If you read the QV book they have a decent (although IMHO not perfect) method to address this, they take the 8 year geometric average of ROA (example). The geometric average and 8 year both underweight the cyclical portion.

Re lack of premium, I think it is important to recognise (a realisation I am only just coming to), for example RoE based portfolio formation might not produce a portfolio of outperforming stocks but those stocks are actually less likely to experience significant drawdown relative to the benchmark (i.e. high correlation with low beta)! Also interesting to note, if you look at the epchan link I posted, that there is starting to find evidence that while "quality" doesn't necessarily influence returns systematically across a universe of stocks, it does influence the future returns of single names along with value metrics. My guess is basically this is capturing the business/profit cycle in a way that value measures never can.



> Asness finds that Quality Minus Junk does produce a premium.




Others too, but how they define this kind of annoys me. If you look at the equity curve you can see it is basically long volatility. You can produce a nearly identical curve by plotting the ratio of SPLV to SPHB ETFs (100 lowest histvol SP500 stocks vs 100 highest beta SP500 stocks rebal annually) or DEF vs SPY or whatever similar and all of the returns come from drawdown periods in the market. This is very similar in concept to how the returns of low momentum stocks are actually positive most of the time. As I said, this annoys me  because better returns can be achieved without the silliness of defining things as a premium. i.e. may as well long high momentum (ignore short low momentum) during bulls and short high beta (ignore long low vol or high qual) during bears. The return premium identified comes from the market regime, not from the stocks themselves, per se, the alpha comes from the managers ability to identify and time the market *as usual*.



> Question: Do you think that Quant managers and those with the simple resources to replicate these measures in a day or two, who read this research and more, will not be front running you as you try to front run them?  I express some skepticism when there is an argument based on non-linear interaction and mispricing is asserted.




Agreed 100%.


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## tinhat (11 September 2015)

systematic said:


> a) I doubt it.  It's only been two months (the MF holding period is one year).  Regardless, the portfolio is down 4.5% whilst the all ords is down 8%.
> 
> b) The MF uses an earnings yield, not an equity yield just out of interest.  But to your point re: a company's past performance...what else is there?  No one has a company's future performance, so the only other alternative would be to be, "forward looking" (as you put it) with the company's performance.  Well that's just another topic altogether, and a dangerous road to travel, in my opinion.  That domain is for super investors, not people like me.  Of course, some pull it off (Buffett, ASF's own, craft).  I can't punt on myself being that good.




*earnings* yield. my bad.

I'm a FA investor and weighted towards income (dividend) with the aim of holding long term, and I don't use a precise model, which is what you are looking for, but, I do look at a couple of things:

- EPS growth. Have earnings over the past few half yearly reports been growing (backward looking but trend seeking)?

- Forecast EPS growth. For what they are worth, consensus targets as provided by Thompson Reuters or Morningstar. Is the positive EPS trend forecast to continue? Where there are less than five analysts making up the consensus forecast, the fewer the number of analysts in the forecast the less weight you give to the forecast.

Personally, if i was using the magic formula model (and I had never hear of it until this thread), I would consider running the results of the earnings yield filter through something that filters for earnings growth trend at least. But I am not a t/a investor, and I don't even know how to back test or run monte carlo simulations, etc.


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## systematic (11 September 2015)

That's all cool, tinhat.  Differences are what make the market!  

My only thought to add is that everything I've read has put me off looking at growth - particular longer term growth.  A little bit of recent growth is okay.  

Re: using forecasts for trend (as opposed to accurate forecasts) - I think that's fair enough.  Even David Dreman thought that was okay.  I just don't think it's necessary to use.  One example summarised from the studies I've read:  which performs better, a P/E using trailing earnings or a P/E using forecast earnings (or even a 50/50 blend?).  The trailing earnings win.  Forecasting earnings trends and looking for past growth trends misses out on mean reversion of earnings.  That's just my take, anyway.  I like that we all come at this differently!


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## ThirtysixD (11 September 2015)

sinner said:


> I'm not sure what  the point of that is exactly, feel free to enlighten me!
> 
> I'm an investor because it's the optimal method for me, all the turnover is handled inside the funds! But if anything, I wish they had a longer holding period, more like allocate 20% of capital each to 5 portfolios (generating a new one and dropping the oldest each year) with 5 year holding period.




Im getting a bit off topic here but even as a mid-late comer you can get an extra 1-2% pa from front running the Russell 2000. 100 or 200 million divided by 50 stocks is really nothing but once you start talking higher aum then etfs can start moving stock prices. Not saying this will be the latest holy grail craze but its something that I have always found interesting.

IDOG for example has 1 bill aum and purchases 50 stock according to yield annually. This leads to 20 mill buying pressure within a short period of time. Might not seem like much for big caps but there are less liquid stocks where this figure is very close to the daily average trading volume.


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## ThirtysixD (11 September 2015)

My mistake above... the us domestic fund is SDOG not IDOG


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## DeepState (11 September 2015)

​


ThirtysixD said:


> My mistake above... the us domestic fund is SDOG not IDOG




This front running idea is a nice thought and an evolution of the index adds/deletes trade.  Managers respond, though.  This from the prospectus of the SDOG:

"The Fund may sell securities that are represented in the 
Underlying Index or purchase securities that are not yet 
represented in the Underlying Index in anticipation of their 
removal from or addition to the Underlying Index."

They will game the gamers.  Also, this is an SP500 universe, so none of them is anything other than a liquid monster, even heading into Christmas period when the index is reconstituted.

It is a good thought though.  The more obvious the rule, the easier it is to simply replicate, the more that trading it will impact prices....the more counter-measures will be in place.  The juice lies with front running the not so obvious quant strategies....


Vanguard has over USD 1bn tracking the Russell 2000 index.  Add BlackRock, State Street... and you have some real money.


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## tinhat (12 September 2015)

systematic said:


> That's all cool, tinhat.  Differences are what make the market!
> 
> My only thought to add is that everything I've read has put me off looking at growth - particular longer term growth.  A little bit of recent growth is okay.
> 
> Re: using forecasts for trend (as opposed to accurate forecasts) - I think that's fair enough.  Even David Dreman thought that was okay.  I just don't think it's necessary to use.  One example summarised from the studies I've read:  which performs better, a P/E using trailing earnings or a P/E using forecast earnings (or even a 50/50 blend?).  The trailing earnings win.  Forecasting earnings trends and looking for past growth trends misses out on mean reversion of earnings.  That's just my take, anyway.  I like that we all come at this differently!




No doubt about it, I don't have the time or inclination to be a trader. There is a wealth in this world to be experienced that far exceeds the value of money. I am however, fascinated by those traders and T/A proponents on these boards that are willing to explain in simple words their ideas and TA ideas and open them up for consideration. A bit of both I say. 

I have a very dear and very senior (in age) mentor (an incredibly patient and forgiving friend). My conversations with him are like being interrogated by Philip Fisher. He asks me about the management of any firm I invest in as if he might know the CEO's grandfather.


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## systematic (23 October 2015)

tinhat said:


> Most of those stocks are in a serious down trend. This may indicate the problem with associating a stock's market price (which is the market's forward looking assessment of the company) with a company's past performance, which is what equity yield does.






systematic said:


> a) I doubt it.  It's only been two months (the MF holding period is one year).  Regardless, the portfolio is down 4.5% whilst the all ords is down 8%.





...A meaningless update at 15 weeks.  Portfolio up 5.5% (from 6 losers, 4 winners).  All Ords down -3%


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## systematic (23 October 2015)

^ Well, that was a bit of a premature evaluation.  Today's move on (particularly) DLS and ACR makes the portfolio 10.8% against all ords -1.5%


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## Ausinvest (7 June 2016)

Hi Systematic, 

Thanks for posting this. I'm new to this whole game and have been doing a little bit of reading on the magic formula. 

Out of curiosity, can you tell me what criteria you used to get the 10 stocks above? Did you use ROA and P/E as per the little books instruction? What did you set your market cap, ROA and p/e minimums at?

Running my own numbers at the moment, if I take the books instructions word for word (I.e. ROA > 25% and P/E > 5, excluding financials and utilities), I get a pretty small list!

I'm still reading and learning, with a while to go before I actually throw some money into anything, but I'd really appreciate hearing how you got your numbers. Also - can you tell me what your list would be if you re-ran it today - if not too time consuming?

Many thanks


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## systematic (8 June 2016)

Ausinvest said:


> Hi Systematic,
> 
> Thanks for posting this. I'm new to this whole game and have been doing a little bit of reading on the magic formula.




...Welcome to ASF!



Ausinvest said:


> Out of curiosity, can you tell me what criteria you used to get the 10 stocks above? Did you use ROA and P/E as per the little books instruction? What did you set your market cap, ROA and p/e minimums at?




I used the criteria in the (first edition) little book, which can also be found on wikipedia

If I remember correctly, the author might have, later in the book, suggested P/E and ROA as being more readily available.  I prefer the other ratios, generally.

I honestly can't remember what market cap filter etc I used - I'd have to look for the file (it'd be there somewhere)...but really, it was just a fun exercise.




Ausinvest said:


> Running my own numbers at the moment, if I take the books instructions word for word (I.e. ROA > 25% and P/E > 5, excluding financials and utilities), I get a pretty small list!





Well, the original version is a ranking system - so there are always stocks available.
Using absolute numbers is fine, but you sometimes won't get as many.
By the way - I remember the author had a P/E min of 5 in that version...but you haven't mentioned that you still want those with ROA > 25% and THEN sort by lowest P/E (eliminating any under 5).  The min PE of 5 was only a suggestion, to avoid any strange outlier figures.



Ausinvest said:


> I'm still reading and learning, with a while to go before I actually throw some money into anything, but I'd really appreciate hearing how you got your numbers.




I used the ratios you'll find on the wikipedia article (or the book)...and did a combined rank with equal weighting, as per the main body of the book. 

Side note - it doesn't really matter much.  Every example I've seen shows ranking or sensible absolute numbers to show about the same results.  It's only that ranking always gives you opportunities.



Ausinvest said:


> Also - can you tell me what your list would be if you re-ran it today - if not too time consuming?



Sure, but I'll do it via the quick method (i.e. a quality minimum, and a value minimum...sorted by cheapness).  

I get...

XPD	XPD Soccer Gear
PXS	Pharmaxis
RMS	Ramelius Resources
SHM	Shriro Holdings
MOY	Millennium Minerals
TAM	Tanami Gold 
TTC	Traditional Therapy Clinics
CII	CI Resources
MND	Monadelphous
PRT	Prime Media


I note that MND and PRT are still on the list almost a year later, and they have not been good performers.  This is where investing tests our psyche.


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## systematic (27 June 2016)

Not that I set out to track this, but I noticed it was coming up to a year.  So in case I forget to post real-time, this is what we'll do.
We'll make it "real life-like" - and sell any losing trades (determined by Wednesday night) on open on Thursday, to get it in this financial year.
Any winning trades will be sold on open, Monday 11 July.

We'll "buy" a new lot after that, depending on when I post them.


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## systematic (12 July 2016)

One year update.

VEI got taken over in November '15 by a Chinese unlisted company (34% profit)
DLS got taken over in March '16 by Beach Petroleum (39% loss on trade).

These closed trades were never replaced through the year.

Of the remaining 8 trades 4 were closed in profit, 4 at a loss.

The average loss of the 5 losers was 31% (biggest loser, PRT at 49%)

The average win of the 5 winners was 58% (biggest winner, DRM at 167%)


The overall return was 13.45%
There was a healthy dividend collect of 6.26% (almost entirely fully franked) making a total return of 19.71% for the 12 months.


Over the same period the All Ords did approx -2.6% with the All Ords Accumulation approx +2.0%


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## systematic (18 July 2016)

I was pretty much not going to bother posting an update, as I really didn't know if anyone was interested.  I received a request via PM, so at least one person is - here they are.

For tracking purposes, I'll use the average of the closing price of Mon-Fri this week (18-22 July 2016).  If anyone is against that or has a better alternative, let me know.

Liquidity - a person with a very low 6 figure portfolio should be okay...but someone with a larger portfolio (invested in this strategy, not necessarily total equity or total investment portfolio) would probably want to go further down the list (not posted) or more likely, re-do the numbers just for the ASX200 or whatever.

I'll post below so they sit on their own post (in case anyone needs to link to it in future).


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## systematic (18 July 2016)

Magic Formula Selections July 2016


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## systematic (18 July 2016)

ASX 200
Magic Formula Selections July 2016


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## Junior (18 July 2016)

I am enjoying this.  I suspect there will be many lurkers who are following this thread.

Keep up the good work.


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## systematic (18 July 2016)

Junior said:


> I am enjoying this.  I suspect there will be many lurkers who are following this thread.
> 
> Keep up the good work.




Cheers Junior.  All good.  I don't mind posting for even just a couple of interested people; I just thought it had gone by the wayside.  Thanks for letting me know.


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## systematic (18 July 2016)

I forgot to add...and I don't even like these statements as I see them as completely unnecessary, most of the time.  Common sense!  But for whatever reason, I feel like I should add it this time (I've never bothered before).

*Reader's please note:*
The above posts of mine containing tables of various ASX listed stocks are for informational, educational and entertainment purposes.  *They are not recommendations and they are not advice.*  They are posted within the spirit of a stock market forum.

*Beginner's (and all reader's) should especially note:*
You should not invest or trade on information you find on a stock market forum; including my posts.  You should obtain good financial advice from a suitably qualified financial advisor.

*Disclosure:* 
At the time of posting (18.07.16) I do not hold any of the companies mentioned in the tables posted today.


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## lauriejay (10 August 2016)

systematic said:


> ASX 200
> Magic Formula Selections July 2016
> 
> View attachment 67470




New to investing in shares and have just read Greenblatt's book.Just curious as to which 'Stock Screener' you use in order to narrow down ASX companies using : High Earnings Yield and High Return on Capital?


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## herzy (10 August 2016)

I'm a lurker reading with interest. Thanks!


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## Boggo (10 August 2016)

lauriejay said:


> New to investing in shares and have just read Greenblatt's book.Just curious as to which 'Stock Screener' you use in order to narrow down ASX companies using : High Earnings Yield and High Return on Capital?




Learned a long time ago that a lot of that funnymental stuff is fiction and all is past tense but this may help you find what you are looking for.

http://www.sharefilter.com/ASX_Fundamental_Screen.php


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## systematic (12 August 2016)

Boggo said:


> Learned a long time ago that a lot of that funnymental stuff is fiction and all is past tense




Never in my life have a seen a stock chart that is not past tense.

I know I've only posted 1 year of results (19% return) and that could well be the fluke result of relying on "fiction" - but seriously?  Do the efforts in this thread really warrant that kind of remark?


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## Boggo (12 August 2016)

Boggo said:


> *I learned a long time ago that it didn't work for me and my experience has been* that a lot of that funnymental stuff is fiction and all is past tense but this may help you find what you are looking for.
> 
> http://www.sharefilter.com/ASX_Fundamental_Screen.php






systematic said:


> Never in my life have a seen a stock chart that is not past tense.
> 
> I know I've only posted 1 year of results (19% return) and that could well be the fluke result of relying on "fiction" - but seriously?  Do the efforts in this thread really warrant that kind of remark?




I have amended my comment to how it should have been written to cater for those of a sensitive nature 

You obviously weren't around or are not familiar with the likes of Onetel, Harris Scarfe and ABC Learning etc just to name a few to see just how misleading some of this stuff is.
A recent example perhaps was DSH where the brokers and commentators were talking it up based on nonsense.

*I learned a long time ago* that if the talk is going up and the chart is going down the chart (price reality) has always been right.
If you ever lose three months of gains in one week (and I hope you never do) based on BS you will see what I am talking about.


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## Value Collector (12 August 2016)

Boggo said:


> Learned a long time ago that a lot of that funnymental stuff is fiction and all is past tense




Do you not think that over time the performance of the shares eg. share price performance and dividends is tied to the performance of the underlying company?

If you agree that the performance of the underlying businesses matters, then wouldn't it naturally follow that a person that had a good grasp on business valuations and understands the underlying businesses can put together a portfolio of companies that as a group can out perform the market?

Maybe your struggles with what you call "Funnymentals", stems more from the fact that you don't have the skills to know what is important and what's not.

I mean there are plenty of people that have out performed the market using sound business like investment practices, are you saying that the have in reality done it by luck alone?

How would you explain the over performance of the likes of warren buffet for an example, or his many peers.

------------------------------

I am no to interested in getting into a charting vs value investing debate, I just want to point out that not everyone that says "I tried a fundamental approach and it doesn't work" actually knew what they were doing.


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## Boggo (12 August 2016)

Value Collector said:


> Do you not think that over time the performance of the shares eg. share price performance and dividends is tied to the performance of the underlying company?
> 
> _Yes, most definitely but it is how you measure it that we are discussing._
> 
> ...




I bet that there are more fundamentalists holding BHP than there are holding RRL and the reverse would apply for chartists.

(click to expand x 2)


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## Ves (12 August 2016)

Hey Boggo,

What do you think this chart says about the health of the company?


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## Boggo (12 August 2016)

Ves said:


> Hey Boggo,
> 
> What do you think this chart says about the health of the company?




No idea, not interested in that aspect, I trade to make money, not marry the flamin thing 

Way too little detail on there but to give a response for you to comment on and assuming they are dollars on the Y axis there may have been a completed trade with about 75c profit and a possible re-entry for a second bite.
The erratic volume would come into question though.


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## Ves (12 August 2016)

Boggo said:


> No idea, not interested in that aspect, I trade to make money, not marry the flamin thing
> 
> Way too little detail on there but to give a response for you to comment on and assuming they are dollars on the Y axis there may have been a completed trade with about 75c profit and a possible re-entry for a second bite.
> The erratic volume would come into question though.



Fair enough.

The stock is ACO.

That chart represents the last months of the company's history as a tradable stock.  *It was suspended at all time highs. *  And now it's in administration and I doubt shareholders will see a cent.

The main point,  it's in a up-trend, and if you were in the trade,  and it's pretty hard to deny that some discretionary or technical systems traders would have found entry signals, you'd have lost the lot. I don't see many obvious exit signals.

It's fine to point out failures like ABC,  BHP, Onetel,  Enron,   but technical analysis is just as fallible.

Position sizing does save the majority of your capital from those kinds of trades (both tech and fundamental). 

Although I still question the legitimacy of conflating brokers reports with actual fundamental analysis. People probably do follow them,  but people do a lot of stupid things.

(any way,  sorry to hi-jack your thread systematic)


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## systematic (12 August 2016)

Thanks for the reply, Boggo.



Boggo said:


> I have amended my comment to how it should have been written to cater for those of a sensitive nature




...Been around too long to have any sensitivity about that.  But I do think your amended comment reads better.  I don't like when opinion or experience is stated as fact for everyone.




Boggo said:


> You obviously weren't around or are not familiar with the likes of Onetel, Harris Scarfe and ABC Learning etc just to name a few to see just how misleading some of this stuff is.




...Mate, firstly - that's just an assumption, is it not?
My friendly challenge to you is to answer what a failed company / companies has to do with a thread about the systematic use of fundamental data?




Boggo said:


> A recent example perhaps was DSH where the brokers and commentators were talking it up based on nonsense.




...I recently selected DSH for a portfolio in a thread that craft started.  That portfolio, like the magic formula portfolio posted in this thread is also performing just as terribly.




Boggo said:


> *I learned a long time ago* that if the talk is going up and the chart is going down the chart (price reality) has always been right.




...I recently posted in a thread, in answer to a query on fundamental clues to bankruptcy risk, that a very poor price performance (relative to market) is one of the potential signs.




Boggo said:


> If you ever lose three months of gains in one week (and I hope you never do) based on BS you will see what I am talking about.




Losing three months gains in a week?  Wouldn't be unheard of at all for me.  I was looking like being up around 10% for the past 3 months since mid-May in my 'real-life' portfolio.  I'm suddenly back down to just under 3%.  Nothing unusual.

Another example:  there was a poster in the thread I mention (that craft started) who was incredulous and worried that I'd actually bought DSH.  It's a 25 stock portfolio!  Sorry, but I don't consider a 4% portfolio drop a disaster at all!  I don't need a company to go bust for that to happen, anyway!



Comment:  I've mentioned in (yet another) thread (I don't normally enter the F/A or T/A 'debate')....that I don't see stock analysis as being under a "F/A" or "T/A" analysis umbrella.  It's either a qualitative assessment or a quantitative assessment, in my book.  The data inputs can be price, volume, financial data, media data or whatever.  I agree - there's a whole slew of opinion formed on stocks based on subjective analysis of financial data.  Some good and some bad.  Same thing for "T/A."  There's good and there's bad subjective analysis of stocks based on stock price or price/volume charts.

Anyone who reads my posts would be in no doubt that I have no time for either, in my own investing.


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## systematic (12 August 2016)

Guys, please don't take this as, "this is my thread, you can't post to it"...but this thread, like the NCAV thread I started...I'd like it to stay on the topic it was set up for.

Can we please move any "charts vs FA vs TA or whatever" to another thread?


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## Boggo (12 August 2016)

Ves said:


> Fair enough.
> 
> The stock is ACO.
> 
> ...




I've had one of those too with TA, AED, back in around 2007 I think (don't even want to look), and it took me to the cleaners  
Lesson there was having the level you are willing sell at being set to much lower than the stop trigger otherwise your sell price can get "jumped" over and you are still holding (hope that makes sense, current example pic below).



systematic said:


> Thanks for the reply, Boggo.
> 
> ...Been around too long to have any sensitivity about that.  But I do think your amended comment reads better.  I don't like when opinion or experience is stated as fact for everyone.




Fair comment.

Stop Trigger example


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## lauriejay (12 August 2016)

*Magic Formula for ASX*

After reading Greenblatt's book "the little book that beats the market' ,i'm contemplating using his methods on the ASX.
However his website is very handy but only works for the US Markets.
Does anyone recommend a good Stock Screener website or software that is free for a beginner.
I would pay for one in the long run but as i'm new i don't want to spend hundreds of dollars on software that won't help me.

Also i'm thinking of joining NAB Trade as they have the option of trading in the US aswell as Australian markets.
Has anyone had any negative comments about using them?
I was going to go Bell Direct or CMC but they don't have an overseas option for trading.

Any comments would be gratefully appreciated.


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## luutzu (12 August 2016)

*Re: Magic Formula for ASX*



lauriejay said:


> After reading Greenblatt's book "the little book that beats the market' ,i'm contemplating using his methods on the ASX.
> However his website is very handy but only works for the US Markets.
> Does anyone recommend a good Stock Screener website or software that is free for a beginner.
> I would pay for one in the long run but as i'm new i don't want to spend hundreds of dollars on software that won't help me.
> ...




To screen for stocks so that you can narrow down to the select few you can understand and are currently looking real interesting... that you can practically use any free research database - on web or free with your trading account.

To get deep into the business and properly analyse its financials so you could be confident about its operations... you'd need more than those basic figures.

Either work that out from the various texts, learn accounting then set about with excel or pen and paper...

Or try my, ahem, awesome, and free, web-based app:   www.danginvestor.com


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## Boggo (12 August 2016)

Just a suggestion.
After back testing various sectors etc I found the best results with just the stocks that make up the All Ords.

That is best for my system but will be either be too big or too small for others.

Possibly a starting point maybe rather than dealing with around 2000 stocks ?


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## systematic (13 July 2017)

Just for the exercise, we'll sell losers on Friday close tomorrow, and winners on next Friday's close.


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## systematic (22 July 2017)

Second year update.

This time we did an 'All Stocks' and also an ASX200 version (the 'All Stocks' would relate closest to the previous year).

In the All Stock portfolio:  7 out of 10 trades were profitable.  The average gain of the winners was 29.5% (there were no runaways, max was JIN at 77.5%).  The 3 losers lost 9,12 and 20%

The overall price return was 16.6% 

Dividend payments (interestingly, 9 out of the 10 stocks paid a div, with 8 of those 9 at 100% franking) resulted in an additional 4.77% 

Total return for the 12 months: 
21.41%


In the ASX200 portfolio: 1 stock (SAI) was bought out half-way through the year (was not replaced).  7 out of the 10 trades were profitable.  The average gain of the winners was 26.8% (again no runaways, max was MND at 65.5%).  The 3 losers lost 4.3% (which was lost in the last week - wasn't sold the week prior with the other losers as it was sitting on a win) along with 8 and 26.2%

The overall price return was 14.9%

Dividend payments (paid by all 10 companies with 9 out of 10 being fully franked - not as surprising, as this is the ASX200) resulted in an additional 4.43%

Total return for the 12 months:
19.38%


The 'market' (this time I'll just use ASX300 / ASX300 accumulation) did around 2.5% and 7%


Comments for fun:
- I was surprised / amused that the 2 portfolios (All Stocks and ASX200) produced virtually identical results.
- The previous year had 2 takeovers, this year had 1 (only in the ASX200)
- FLT (Flight Centre) was common to both All Stocks and ASX200 portfolio and gained 33%
- PRT and MND were on the first year's list...both had lost about 17%.  PRT remained in the All Stock portfolio and gained 30% this year; MND was in the ASX200 portfolio and gained 65% this year.
- Dividends are important; this year accounting for almost a quarter of the return, same as last year


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## Alan5056 (12 October 2017)

Hi Systematic, I was wanting to do some Magic Formula investing but I' struggling to ind good data to do the analysis. I signed up with the trial for Lincoln Indicators but it seemed a bit excessive to pay $1600 a year just to use their data. Is there a more accessible source of data that you know of?


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## systematic (15 July 2018)

Not sure if @Alan5056 is still about.  After 2 years of posting between mid-2015 and mid-2017 (with a total return CAGR of 20.5% - beating the market and no doubt most traders and fund managers), I didn't bother posting selections for 2017/18 as I didn't feel there was any interest or demand - which was no problem, as I don't follow this system in my own plan.  It was just for interest.

Anyway - for whatever reason I came up with the selections (as I see them) for 2018/19.  Possibly due to the somewhat revived interest in individual stocks and the others running excellent trading threads etc.

This time no split between ASX200 and all cap ranges etc.  Just the top 30 like Greenblatt mentioned in his book.

Will follow the Top 10 (to keep in line with previous 2 years) as well the as 30 as a group (31 actually - yes, I realised that!)

I might have to bother doing the selections for 12 months ago now, hmmm...not sure.  Anyway, here's the current lot.


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## 12Percent (22 November 2018)

Hi Systematic, 

I am definitely interested in your ongoing findings, I have been reading several books on this topic and am in the middle of Tobias Carlisle's Deep Value book.

The findings that the ROIC inclusion in the formula cost returns and that the Earnings Yield alone produced better results when back tested has me intrigued, what are your thoughts? 

They indicated that the heavily undervalued companies produced results regardless of the quality of the company.

I notice this site: http://www.shareranker.com/ produces the Greenblatt's formula on the ASX, currently there are a lot of miners there.


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## systematic (22 November 2018)

12Percent said:


> Hi Systematic,
> 
> I am definitely interested in your ongoing findings, I have been reading several books on this topic and am in the middle of Tobias Carlisle's Deep Value book.
> 
> ...




Hey 12Percent, I look at a lot of things for fun. I've made a few comments on 'company quality' - it's a tricky area of so-called factor investing.  I don't use it.  But I might.  My personal research on 'quality' as a factor has thus far led to my current conclusion that _if_ I end up using it, it will most likely be on its own.  In other words, I largely agree.  Value works - on its own.  I don't like growth at a reasonable price or quality at a reasonable price.  Neither does the author of the book you mentioned.  *But* that's not to say it's not a good strategy, and in fact it may be a better strategy profile for some investors compared to not using it (the ROIC bit).  

My comment on your last sentence - there's always a lot of miners in an ASX screen


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## InsvestoBoy (22 November 2018)

I have recently been reading up on https://www.newconstructs.com/education/

Key points:
- If you are using the accounting numbers from annual report without adjustment from the footnotes, you are nearly always using bogus numbers.
- Value measures like EV/EBITDA and P/E and performance measures like ROE do a poor job of measuring real economic value.
- ROIC, WACC and PEBV (Price to Economic Book Value) from footnote-adjusted numbers are much better measures.

They provide a lot of useful and convincing examples of this.

The numbers they produce are the result of *30+* adjustments to the annual reports.



> Accounting data is not designed for equity investors, but for debt investors. Accounting data must be translated into economic data to understand profitability and the valuation relevant to equity investors. Respected investors (e.g. Adam Smith, Warren Buffett and Ben Graham) have repeatedly emphasized that accounting results should not be used to value stocks. Economic Earnings are what matter because they are:
> 
> 
> Based on the complete set of publicly-available financial information.
> ...




Worth a thorough digging into their Education section. After you do you can see why Buffett doesn't use normal valuation metrics and get a closer feel for what he does use.


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## 12Percent (23 November 2018)

Sorry, I didn't get to finish my post and did not mean for my final sentence to be a statement.

I notice in the previous postings of your top ten companies there were little to no miners, possibly just a result of cyclical factors however just curious if you were omitting them for personal reasons or rules you follow.

I have nothing against miners however, there are currently 5 in the top 10 so just considering the diversification issues, pushing it out to 20 takes the miners to 8 so a little better. 

I'm going to run a trial where I look at the top 20 from the list however rank them purely on value using the Earnings Yield alone.


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## luutzu (23 November 2018)

InsvestoBoy said:


> I have recently been reading up on https://www.newconstructs.com/education/
> 
> Key points:
> - If you are using the accounting numbers from annual report without adjustment from the footnotes, you are nearly always using bogus numbers.
> ...




While it's true that adjustments will need to be made, there's a balance of when and where to make it else it can be an overkill.

I mean, you could arguably readjust new constructs' adjusted figures. Depends on the company, its industry and the interactions at that moment in time you're doing the analysis. 

So to "properly" adjust and make detail assessment for each and every year... while great if the investor has the time, might not be effective use of resources. 

For what it's worth, I think that in general... the financial statements figures should be left as they are. That we ought to first assume management to be honest and interpret, assess the company's position and performance as professionally as they could. 

Then with careful analysis/screening of those same, standardised figures... an investor can zero on in to obviously "interesting" [quality, potential bargain] businesses. 

It is after the basic screen and filters, based on detailed set of metrics... giving selected few interesting opportunities to pursue further... that's where detail adjustments to the figures; calling around, looking up further detail of the business etc. should then be made.

e.g. management report rising net profit. It looks great. Are they being too optimistic of recovering/getting those reported profit? Are there cash flows backing up those great profit figures? Are inventory too low/high; receivables rising abnormally [i.e. they relax their credit policies to move items and record profit] etc. etc.


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## systematic (23 November 2018)

12Percent said:


> I notice in the previous postings of your top ten companies there were little to no miners, possibly just a result of cyclical factors however just curious if you were omitting them for personal reasons or rules you follow.




...It would have been cyclical. I was following along with the book and only eliminating financials and utilities.



12Percent said:


> I'm going to run a trial where I look at the top 20 from the list however rank them purely on value using the Earnings Yield alone.




...Why not just look at earnings yield alone then? I'm not sure why you'd use a 'magic formula' list *if* you're wanting to just look at the value component? But I may not have understood.


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## 12Percent (23 November 2018)

I am yet to find the right screener I can use besides this list, I was just filtering the first few pages of the that list to find the top 20 earnings yields manually. 

Were you doing the sums yourself or do you have a link to a screener with this metric built in?


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## BBf (20 July 2019)

12Percent, I've almost got it to work on https://www.tradingview.com/screener/

You could set it up like I have in the image just below, but it won't be the exact Magic Formula approach. I'll explain exactly what I did below, skip it if it's too basic for you.




Instead you could set no ROIC limit and export the data to CSV format to use in excel / google sheets or whatever spreadsheet software you use, which gave me columns B-F in the image below.

Second, I filtered out Financials and Utilities (column E) and any Market Cap under 50m (column F).

Third, I created the Rank P/E column (column G) - the formula I used in G2 was "=iferror(rank(C2,C$2:C,true),9999)" and autofill that for the whole column.

Fourth, the Rank ROIC column (column H) - starting with "=iferror(rank(D2,D$2),9999)" in H2

Fifth, the Sum column (Column I) - starting with "=sum(G2:H2)" in I2

Sixth, I inserted the Magic Formula Rank column (Column A) - starting with "=rank(I2,I$2:I,true)" in A2.

So I ended up with this on 19/7/19:



But, if you do all of this, you'll end up with a different list to shareranker.com, with different values for P/E and ROIC. So I don't know where that person is getting their data, and if I should go with shareranker.com or doing this myself.

The online lists are either free and don't have all of the values needed for Magic Formula (e.g. missing ROIC or EV or EBIT...) or I can't tell if they have them in their premium products.

Any help from anyone on this would be great!


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## JacksonMSB (22 July 2020)

I'm currently exploring the same scenario. I'm using a fantastic website called simplywallst.com. They offer a free trial. Mine's nearly over but I will be subscribing because the info is excellent. You do need to do some fact checking though. For example, they can be a bit slow to react to insider selling. Check the ASX report for yourself. As for magic formula stocks, I have decided I will use magicformulainvesting.com website for the USA picks and then review their profiles on Simply Wall St and look for comps in the ASX.


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## JacksonMSB (23 July 2020)

I'm currently exploring the same scenario. I'm using a fantastic website called simplywallst.com. They offer a free trial. Mine's nearly over but I will be subscribing because the info is excellent. You do need to do some fact checking though. For example, they can be a bit slow to react to insider selling. Check the ASX report for yourself. As for magic formula stocks, simplywallst website lets you filter for price on earnings and assets as well as setting market capitol mins/maxs. Once you select your top selections (I personally also look for low debt to equity) you can create a Watch List which will then prepare performance results also all able to be filtered ie: industry, performance, dividend, etc. Fantastic tool owned and operated from Sydney, Australia.


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## JacksonMSB (5 August 2020)

As a back testing exercise, I used the simplywallst website to filter NYSE companies (as per magic formula) based on PE+PB+$50M+ market cap. I then sorted the results by every conceivable variable: high to low / Low to high / market cap / PE / PB / value / Total score, etc. It didn't matter. I could not replicate the magic formula website top 30 companies. I could accept some variance but not one of MF's companies appeared in my search results. NONE! Consequently, I'm having major misgivings about using this strat.


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## den95deb (19 August 2021)

lauriejay said:


> *Magic Formula for ASX*
> 
> After reading Greenblatt's book "the little book that beats the market' ,i'm contemplating using his methods on the ASX.
> However his website is very handy but only works for the US Markets.
> ...



ok now 2021 just read the book did you follow his advise if so how's it going for you?


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