3rd Quarter Performance

First I must appologize for either blogger or myself. I had posted my results on Friday September 29th only to find that they never posted. The image file was saved but, the blog never updated. Anyway, I'm sorry if you were looking forward to the update.

Please see the chart for my 3rd quarter results. Yes, this includes dividends and reflect my results as of 9/29/2006 . Please note that I am beating the Russell 2000 but I am losing to the S&P500 index.



Also of note. After watching this video of Joel Greenblatt at Columbia University I've decided to further deviate from the Magic Formula.

http://merlin.gsb.columbia.edu:8080/ramgen/video3/admin/alumni/Reunion_2006/Reunion_4-8-06_Greenwald.rm

It has been 10 months since I've read "The Little Book That Beats The Market" so it was nice to have a little refresher course on the theories and rules. In order for the Magic Formula to be a complete system, and to be able to back test the formula, Joel G. had to give instructions on when to sell our MFI positions. One year is a completely arbitrary number he could of easily chosen 6 months or even a 3 year holding period.

As value investors know, even if a company is currently undervalued by any and even all measurements, there is no guarantee that the market will agree with you anytime soon, if ever. If the market does respond quickly and reaches a fair value or we earn a return that we as investors find satisfactory, why not sell our position(s) earlier than 1 year? If the market takes longer than a year to fully recognize the value of the companies we purchase, why not hold the position longer (as long as we still find the prospects of the company favorable)?

Today, I place several Stop Limit orders in on my MFI portfolio. This year has been a very up and down market and is currently trading at a multi year high. Many MFI companies are in industries that are outside my circle of competence and I found it prudent to protect some of my gains. I'll let you know how this works out.

Wrong side of a hedge fund's liquidation...RAIL?

Months ago I asserted that it was possible that I was losing money in RAIL because insiders were selling their positions. Recently, Pirate Captial LLC. has admitted to liquidating their position in RAIL without disclosing their liquidation in a timely manner. See the related article here.

I've not taken the time to read Pirate's amended filings, but I wouldn't be surprised if I was on the opposite end of Pirate's first attempts to slowly move out of their substantial position in Freightcar America Inc.

Pirate Capital, known for it activist style investing, has recently closed the door to new investors and had several analyst leave. This might also affect MFI company PWEI which if I remember correctly was a potential target if the Pirate.

I'll update on my quarterly performance tomorrow.

-Nick

A Bit of hope...when your MFI pick drops 50%or more.

I am sitting at my monitor at 11pm on a Friday night searching for investment ideas beyond the Magic Formula, when I stumble across a Motley Fool article by Tom Garner. Tom is one of the founders of the Fool. Anyway, the kid has been asleep in bed for hours but given a title like "Let's Find the Next 60-Bagger" ,I must be the one dreaming- right? Maybe.

Tom's lesson for us isn't about dreaming its about fundamentals and sticking to your guns in the face of 50% drops in Market Capitalization in a short period of time. Take a look at the article, I know a few of you have experienced a significant decline in the price of your pick once if not thrice since following Greenblatt. Personally you know of my experience with ALDA, but I know of at least a dozen MFI stocks that have done this while on and off the list...hold fast and check out the Fool. It might just be part of the 60-Bagger club (60 Bagger returns 60,000%.)

I find it interesting that depending on the time of purchase that one person's worst performing position is another's top performer-even within the same quarter. It really shows you that timing is everything, but don't let that fool you into thinking you can time the market...if you could you wouldn't be reading this or Joel Greenblatt for that matter!

Good Luck and tune in next Friday for my Third Quarter update, hopefully I'll be crushing my benchmark!

-Nick

Q: What is 10% annualized?

A: Roughly the difference between sticking to the Magic Formula vs. Me Deviating from the formula. Observe my result if I had not deviated:

Though my returns for my deviated porfolio stand at nearly 7% annualized-had I not deviated, had I made NO purchases the result of my porfolio would be that of the above spreadsheet. A 16% Internal Rate of Return, not bad! This unfortunately is not an accurate alternate ending if you will. I made 6 additional purchases of MFI stocks while they were still on the list. That capital would have gone to other MFI stock in my portfolio, increasing my diversification and potentially affecting my rate of return. For better or worse, we'll never know. What I do know is that I would have more money if I never messed with the formula and that is my lesson for you.

Do not underestimate the difficulty of sticking to the formula. It seems only human to want to try to improve upon the model. That said, I'm still making money but not significantly more than the current CD rates.

My question for you dear reader: Would you prefer to have this blog focus on my struggles (read: deviations- factual accounts of my experiences) or should I tailor this to a strict adherence to the model (Read: leave out reporting of any deviations) ?

I only ask because the comment below would leave me to believe that a strict adherence would be more beneficial. Intuitively, sticking to my actual experience while anecdotal might be more realistic and therefore more helpful. Please post a comment to let me know your preference!!

Anonymous said...

Nick,
I've been MFIing almost exactly as long as you. On a $150K investment I've made $12.5K so far. One thing I've noticed from your blog is that you are NOT following the directions!
I know that is harsh but I'm trying to help you. You're supposed to buy 5-7 stocks, wait 3 months or so and buy another 5-7 stocks, etc. etc. until you have 25-30 DIFFERENT stocks. I try to buy my "blocks" all on the same day. I never rebuy a stock...ever! I'm going to buy another 7 stocks for 50K in November all on the same day. Also, somewhere in the book or on the website is the phrase "no further analysis of the selected picks is necessary" HEELLLLOOOOO! You're working too hard at this....it was meant to be a brain dead process. You might as well take the list of the top whatever and throw darts at it to pick 'em. I love investing this way because it's about one step above playing in a sandbox. Try to keep it that way :)

1:50 PM

I agree completely with the comment. Unfortunately, I hate brain-dead activities, but I will try to stick to the model in the future- of course that was my objective when I started doing this in January!

For those doing actual analysis some tips from the CFA Institute:




Till next time-

Bill Rempel on the Magic Formula

http://www.billakanodoodahs.com/?p=10

Great Day for MFI

NSS a MFI pick that I didn't invest in was up 40% yesterday on the news of a buyout. Today my portfolio jumped over 3%.