MFI Upside Down

I re-read the Litle Book That Beats the Market today. Not a huge feat as it is not much over 100 smallish pages. But every time I read it, I come away with new thoughts. The table that caught my eye today is where he splits the market into 10 groupings of 250 stocks each per their rankings of the formula. It shows that the top group has about a 17% annual return, while the bottom decile is 2.5%.

That made me wonder... "what kind of stocks get in the bottom decile?" Not that I would consider "shorting" stocks (not my style), but rather those are clearly stocks that should be avoided in my (and your) non MFI portfolio.

The simple answer to the question is "stocks with negative earnings" as they will score poorly on Earning Yield and Return on Capital. To go a step further, I would hypothosize that is probably bio-tech stocks. To check on this, I ran the Greenblatt scan (MF style rankings based off Yahoo Finance ) and sure enough, virtually all the bottom companies are small pharmaceuticals and bio techs. I will confess, I actually own one of these companies, DCGN (actually #2618 out of 2722). We all dream of the home run, where the drugs for a small company come out of phase III and the stock pops. But thinking long and hard about it, MFI implicitly says that all-in-all it is a bad idea.

So I will be selling DCGN this next week Not sure what I'll do with the money, probably I will buy an insurance company stock as they have been pummeled by "Hurricane Hysteria".

The other item of note I read about was JG emphasizing that some stocks on his list intuitively seem like ones you would not want to own (I certainly saw a few in my recent analysis). But he chides us that most people (meaning me and you) and not qualified to pick individual stocks and that the formula in its entirety does work over a portfolio. So I will take a chill pill and not get all uptight.

A great example in MTEX. There was a Phil Town blog I read about MTEX last week. Frankly, it made me 2nd guess my purchase and consider selling against "the rules". The blog was extremely negative, referring to several class action lawsuits against MTEX and that the Texas AG was looking into their claims about their products. But after my read of the book today, I have more faith to hold for the year. MTEX is just part of overall portfolio and to be honest, class action lawsuits and AG investigations seems more like the rule in today's litigious world rather than the exception. Time will tell.