Magic Formula on the ASX

[systematic]

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!

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.

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.

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.

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.

 

[systematic]

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.

 

[systematic]

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%

 

[systematic]

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).

 

[systematic]

Magic Formula Selections July 2016

 

[systematic]

ASX 200
Magic Formula Selections July 2016

 

[Junior]

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

Keep up the good work.

 

[systematic]

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.

 

[systematic]

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.

 

[lauriejay]

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?

 

[herzy]

I'm a lurker reading with interest. Thanks!

 

[Boggo]

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

 

[systematic]

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?

 

[Boggo]

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

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.

 

[Value Collector]

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.

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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.

 

[Boggo]

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.

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?

My experience is that the performance of the underlying business is demonstrated in its share price.

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 don't need to get involved in the internals of what is driving the price in any direction, just use the price action.
If I am driving from A to B at the speed limit I comply with indication of the speedo, I don't need to know how many rotations the wheels are doing per Km.

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?

No, I am not. I am saying that it is possible to more accurately measure the health of a company by its price behaviour.
Relying on individual company fundamentals are not a barometer of the sector of the market that they are in.
There are some fundamentally average companies completely out performing the market darlings because they happen to be in the right place at the right time. Individual company fundamental analysis completely misses the sectors that are performing where the sector movement starts to really stand out in group price behaviour.

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

For any individual punter/investor to start comparing themselves with Buffet drawing a long bow, unless they have just found a new Berkshire Hathaway.

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

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.

I am not saying that it doesn't work as such, it is dependant on out of date data and peddled by those such as in the DSH reference above.
Why even bother doing anything yourself, hand it over to a fund manager, you are applying the same theory.

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)

 

[Ves]

Hey Boggo,

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

 

[Boggo]

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.

 

[Ves]

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)

 

[systematic]

Thanks for the reply, Boggo.

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.

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?

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.

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.

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.