Sunday, February 04, 2007

MFI Buying Strategy

An element that has always confused me a bit is that JG in his book had monthly portfolios of about 30 stocks. Yet when he tells us how to implement his approach he tells us 5-7 stocks in 4 quarterly installments.

Why? Why would he not tell us to buy all 30 at once? I suppose it is to minimize likelihood of having a bad first year. If expenses were not an issue, would it be better to buy more stocks?

In my real life portfolio, I am beating the benchmark Russell 3000 by a whisker. But when I look at my monthly tracking portfolios, they are beating the benchmark by about 2 points. Now I understand that in my portfolio, I'll get more variability due to size, while the tracking portfolios are gnerally 50 stocks per month.

Where am I going with this? As I pare through the numbers, it seems more and more obvious to me that MFI works. The only thing that can screw it up is me. Should I make an effort to take me out of the picture? Should I just buy 25 stocks at the end of February as I come up on my 1st anniversary and then let the magic work?

Here are the facts, how just taking the 50 stocks listing with no thinking have done. The 1st column is tracking date start. The next column is MFI performance. The third column is Russell 3000 performance... kind of embarrassing when the dartboard beats you:

01/06/06 16.01% 10.92%
02/17/06 19.48% 13.8%
03/29/06 9.91% 11.85%
04/07/06 11.09% 12.39%
05/12/06 10.22% 12.97%
05/31/06 16.82% 14.68%
06/30/06 18.26% 14.71%
07/31/06 20.1% 14.67%
08/31/06 14.92% 11.97%
09/28/06 14.97% 9.27%
10/27/06 7.44% 5.77%
11/29/06 5.15% 3.73%
12/28/06 2.49% 2.25%


Nick said...


Months ago I cam to same conclusion- This Works, I'm broken. I purchased a 24-sided die to make all future purchasing decisions. The thing is I can't seem to relinquish control. Rolling a die seemed like gambling even if it would provide better returns at with less risk.

Thoughts on the use of dice?


justadrone said...

I don't think I could roll dice or use a random number generator. I think where I was going with my thoughts was to buy a larger basket of stocks. Right now I have about 50% of my investments in non MFI, perhaps I should just go all in and buy 50 stocks a year.

Erik Hochstein said...

One -
Buying all 25 (or more stocks) at once will be a lot more risky - you will be exposed to market timing. Think of the stocks you will buy as an index that moves throughout the year. If you only buy once a year, you would much more exposed to buying at a high and then not realizing the average MFI returns.
Two -
I do think expanding to about 35+ stocks is a good idea. I bought 20 stocks in the beginning and then added 6-8 quarterly. The 20 in the beginning are tracking well -- my May stocks are terrible -- Aug are OK and November is too soon to tell.

justadrone said...

Eric, I agree with you in hindsight, there is value in spreading purchases over the year. I do think though that perhaps 4 blocks of 10-12 stocks might protect me better against myself.