Friday, December 1, 2006
MFI and Volatility
I'd be interested to know the experiences of others, but as far as my first year of Magic Formula Investing goes, I've been a little surprised by the day-to-day and week-to-week volatility of the MFI stocks in my portfolio. You really have to be a believer in the formula, because -- again, based on my own experience -- these stocks tend to jump around a lot. This bothered me at first, but now it is something that no longer phases me. Time and time again, my overall portfolio will drop 1-3% in a day, only to rebound a few days or weeks later. Also, my portfolio crashed this summer (falling well into negative territory), when the Federal Reserve announced that they would continue raising interest rates. I believe this is why it's important to be a true believer in the formula. It gives you confidence to hold on those days when your stocks are falling rapidly. Without that confidence, you are at the mercy of Mr. Market and his crazy daily moods.
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I concur on volatility; I started in 2/06; took three scoops of 7 stocks each 2/06;7/06;/10/06;currently at Annual IRR 36.2%
Unannualized 13.8%;
so far I am a believer!
Volatility shouldn't surprise you at all. The MF screens for stocks that are (unfairly) out of favor. The market is pushing down; a sound company's stock will be pushing up; there's your volatility.
In fact, if an MF pick is not volatile, something might be amiss....
The discussion here appears to be lagging....
Personally I think Greenblatt’s screen is a fine START. I believe it’s important to do further research. The results this year of the random selections are not that exiting. I believe this will continue in the coming years. This because of the –unexpected- rise in commodity prices over the last years.
By this many commodity companies have high returns on invested capital and high earnings yield, which make them to appear on the Greenblatt-screening, although they lack durable competitive advantages.
The volatility shouldn’t be a (big) problem, if you have selected the ‘right’ stocks of the screen. These will of course –like the market- be volatile on the short term (which could create buying opportunities) –over the long term you can expect that the market value will come in line with the business value.
Success in investing,
Hendrik Oude Nijhuis
www.magicformulastocks.com
Good day, sun shines!
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