1. I started magic formula investing project in January this year, it is still too early to tell, but so far it's been performing better than the S&P500. I won't make any claims until I finish with the project after 3 full years of investing, which is what the book claims (i.e. that after any 3 year period, the formula performs better than the market).

  2. Sorry for the late reply, missed the notification on my phone. So far I’m up ~3%.

  3. Thanks for the link, so far it’s going well. Will continue to post updates every 3 to 4 months.

  4. I also reccomend reading Graham's Interpretation of Financial Statements (1937 Edition), especially if Security Analysis is difficult to understand. It was originally written as a supplement to Security Analysis and his classes at Columbia, and it's a nice intro to the accounting and basic definitions he uses.

  5. Thanks for the info, I heard about it after I read Security Analysis. Is

  6. Interesting, thanks for the insight. That's why the bad reviews then, just using the Buffet's name to capture readers but no meaningful substance to the book.

  7. On the topic of ROIC, what are your thoughts about removing goodwill from book value?

  8. forgot to add here, if you are interested in an alternative method you could look into Joel Greenblatt's definition of Return on Capital, which does not include goodwill:

  9. Because the way accounting value assets is not relevant, so the equity of the company less relevant. For example one company can have the best algorithm to solve xyz that in real life they can sell it in 100 million, accounting rules will value it very different, and their balance sheet wont show it

  10. Thanks for the explanation. Yes you are right, but a lot of high-tech companies, especially large mature SaaS companies with no buildings/inventories have large accounts-receivables (subscription paying customers), marketable securities, long term investments, etc, that are very tangible. Apple/Microsoft in this case are primarily selling to an existing customer base (yes, they've been acquiring more customers too but there was an existing chunk of loyal customers), they just come up with more products/services to upsell and cross-sell. As they grow their net income this is also reflected in their ROIC. The point of my post is to show the correlation between ROIC and rate of return on the stock price as a better indicator than just pure revenue growth. Agreed with you that valuing assets is more flawed for accounting purposes with tech companies, but still, for your XYZ algorithm example, a company is more likely to over estimate its worth, which if anything will actually reflect more conservatively from an ROIC perspective. Like anything, adding a margin of safety to account for things like these is paramount.

  11. This is very good. Now if only someone can tell us how to tell if a stock is Value Stock or a Value Trap?

  12. I’m overly simplifying but one easy way to spot a value trap is the growth prospects and trend in earnings. If a company is undervalued and is shrinking financially (earnings decreasing, no moat, etc) then you can’t expect your stock to appreciate in value, unless you are doing a net assets play, which are rare these days anyway.

  13. Hey Victor, in your EV/EBITDA video you say that the operating lease is "some form of debt". Could you explain why this is the case?

  14. Sure, it has to do with a change introduced by ASU 2016-02. I think this article explains it very well, please check it out and feel free to DM if you still have questions (or post in the Youtube comments too):

  15. so according to this the market was undervalued in 1999/2000 ?

  16. That’s the thing, that the market will appear undervalued until it isn’t anymore and that precise moment is super hard to time. The trend was clear up until the year 2000. This isn’t enough to make investment decisions in real time anyway, but it’s interesting data to analyze in retrospect. What I’m very curious about is what will happen when BEER crosses 1 again.

  17. The way I did it I think was taken from "margin of safety" and one of the posters on bogleheads suggestion to come up with the % to allocate to stocks/ bonds. As mentioned, if earning yield was 1% and bond yield was 2% then s/b would be 33%/67%. I did look from 1970's through probably mid 2010's or so. The returns were about the same compared to a 50/50 static investor.

  18. Thanks for the info. Good to know. In the long term fluctuations are smoothed out. It’s similar to people asking should I DCA every month, or 3 months, or 6? In the long term (25-30 years) it won’t make a difference. The dynamic portfolio in your research resembled something similar, where you are still investing but making different contributions depending on the yields.

  19. I'm glad you did the actually book work level research too quantify all of the things my beginner mine has been feeling since Robinhood started pelting me with IPO offers.

  20. Glas you found it useful. I wonder how much RH is getting paid to promote these IPOs…

  21. I’m curious how this calculation would change if you used IPO price and not price at close after the first day of trading. Now obviously most of us can’t get in at IPO price without being accredited investors, but more and more we’re seeing brokerages (Sofi, Robinhood) letting average investors in on the action.

  22. Just ran the numbers for you, the difference is not that significant but figures do improve slightly. Instead of 60% we get around 56%.

  23. Thx for the note. Glad that it worked out for you. How did you assess Albertsons to determine value? It might be early to tell, you are up 1.5x - 2x now but we need a couple more years to see how this one turns out. FWIW, something I didn’t mention from my analysis is that about 5% of the companies had annualized performance of 30% or more.

  24. I like the layout of finviz but thanks for the tips anyhow..

  25. It’s a nice tool indeed. Is the paid version worth it? The free one has plenty of features.

  26. Definitely just running the screener and blindly throwing money into those stocks is not a good idea. I realized that some of the Magic Formula stocks actually have negative earnings, so you should double check P/E ratios yourself. Additionally, since you are supposed to buy/sell every year, it'd be prudent to also screen for companies with good liquidity. I'm doing some research on this now and will start a paper portfolio that uses the Magic Formula for initial stock screening criteria, and then I will apply the following additional criteria:

  27. I’m very excited for the results! Could you keep me updated on your findings? :)

  28. Of course, I already set up the paper portfolios and at some point early next year I will invest some money (maybe 10% of my portfolio) in the Magic Formula. If I haven't reached out or posted anything in 6 months feel free to DM.

  29. [This is not financial advise] It depends on your personal circumstances as well. If you are a long term investor, you are employed and have a stable job/salary that allows you to save money on a monthly basis then there is no reason to have more than 10-20% in cash. If a good investment opportunity comes up, you can use part of your cash reserves to invest and use your monthly income to rebuild your cash position. As a general rule no one should invest more than 10% of their portfolio in a single stock anyway, so why have 80% of your portfolio in cash? Timing the market is extremely hard, so it might be even more risky to have a bunch of cash available waiting on the right time to get in instead of just sticking to your long term investment strategy.

  30. I use multiple ways to determine the financial condition of a company (note that this is a highly subjective list):

  31. If you are looking just for a quick screening criteria you have a handful of financial health ratios you can explore: Current Ratio for liquidity, Working Capital > Long Term Debt to test for potential solvency issues, Debt to EBITDA ratio also for solvency, Debt to Equity to measure effective / not excessive use of debt to generate equity. Make sure you compare ratios with industry standards and also look at historical data to understand trends.

  32. Can’t add much more on top of what everyone else said already. At the end of the day you want to be able to answer the following two questions:

  33. The numbers are nice, especially that 15% earnings yield — you'll get back the full cost of your investment in earnings alone by the 5y mark, if that holds (which is super unusual for a strong US company).

  34. Great post and I’m a holder myself. Just wondering why you said they’re trading at 2% of 52 week high. At 3.46 right now they’re trading at ~48% of their 52 week high.

  35. oh sorry typo. Thanks for pointing that out. I meant 2% of their 52 week low (I screen for companies trading at <15% of their 52 week low)

  36. Own it in a regular account not an ira. Canadians keep some of the div and you get a tax credit. I heard a few interviews with the president, he seems quite good.

  37. For companies with negative earnings try using the EV/EBITDA as well as your valuation ratio.

  38. I'm partly copying/pasting an answer I just gave in another thread. Yes, there are nuances with how taxation works in Mutual Funds vs ETFs, how they are priced, etc. But like someone else pointed out, Vanguard optimizes for taxes in Mutual Funds so this reason alone should not be your deciding factor. The deciding factor comes down to the objective of your investment. Mutual Funds and ETFs are both mere investment vehicles. Due to ETFs' flexibility and share-like dynamics since they are traded on exchanges, you can go beyond the classic passive-investing strategy using indexing to more complex instruments like inverse-ETF (that bet against an index), leveraged ETFs, etc. These more complex ETFs are not suitable for the average investor.

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