One year Anniversary!!

Scroll down for the buy/sell update

In my last post I promised to discuss what I have learned over the past year. I think I made some significant mistakes -mistakes that I'd like to help you avoid. Let's get started shall we?

My mistakes can be classified in two ways:

1. Deviating from the Magic Formula
2. See mistake #1

Hmmn. The best advice I can give you is to not deviate from the formula. Why? It would be very arrogant of me to say that I can improve on Mr. Greenblatt's success; however, that is not why you're reading this. Is it? My real mistakes in order of importance:

1. My purchases were not evenly distributed throughout the year and I made too few purchases. Please observe the chart to see my purchase and sell distribution. This mistake was made for several reasons none of which I think are relevant to the Magic Formula so I won't discuss them at this time. Why the liquidation in October? See mistake number 2.











2. Stop Limit Orders. A Failure and a Success?

Follow the preceding link for an example of what I did. One saved me some money and I lost out on future returns on the rest of them. Net opportunity cost? 1.5% of my portfolio -no I'm not going to annualize that for you. Worse yet. That technique never did sit well with my philosophy. To think that I initially considered the Magic Formula a trading philosophy due to the short 1 year holding period. I liquidated positions I held for less than 6 months in some cases. I should be forced to turn in my copy of the Intelligent Investor as well as The Little Book That Beats The Market. I pruned the the flowers to let the weeds grow. My fear of losing what I had gained out-weighed my fear of my laggards under performing. This is a common mistake, I suggest that you don't make it. Sell your winners on the 366th day and your losers on 364.

3. Doubling Down. I still think that this might be a valuable technique and unlike #2 is one that I have used in the past. This increases the volatility of your portfolio. I do not know the real cost or benefit of this technique to my returns, because I "doubled" instead of purchasing a different MFI company. I made very good gains on two of my doubles; both TGIS and MTEX were big winners. I made a bit in RAIL and lost a ton on FDG. I don't consider ALDA a double down situation because I didn't buy it after large drops, but if you think it is in the same category you should know that I got crushed! If I had passed on doubling up and bought PNCL then we would definitely say that this technique has got to go, but there are other dogs that I might have purchase that would make this technique look great. I think the key here is to wait for a 30-50% drop in price that you feel is market, not fundamentally, driven and then buy in. Only time will tell.

Unfortunately, I am running short on time so that is as far in depth as I am able to go. I have made some new purchases and sold two positions on schedule. I sold CATT and CHKE and I must say that I regret selling CHKE because it a well run enterprise with solid future, but I had to sell to stay on schedule. Frankly, I wish I sold CATT when it fell off the list. Anyway here are my new purchases:

1/9 TRLG
1/10 PPD
1/11 OVTI
I have two unfilled orders EGY and VPHM

I plan to hold 20 Magic Formula companies and will make purchases in Jan, Apr, July, Oct.

Your comments are always welcome!