Wednesday, June 09, 2010


I have been tracking and investing in MFI since January 2006. I know JG said to give it 3 to 5 years, but I am here to say officially that almost 4.5 years into it that it ain't working. This is not based on my actual investing, which it has been pointed out has not followed the rules to the letter, though it has in spirit. This is rather based upon doing exactly what JG backtested, taking the top 25 to 30 stocks every month and holding them for a year. That is exactly what my tracking portfolios do and if you had invested $100,000 evenly in 12 months of 2006, you'd be sitting on $96k. Granted that is better than the $90k you'd have if you'd have gone for the Russell 3000 in the same fashion, but it is pretty lame and works out -1% annual return vs -2% for the IWV.

At that rate, we are not going to have to worry about JG's final chapter when he asks what we should do with all the money.

I am not sure I understand why it has been so poor. These have been unprecedented times, to be sure. But I have been stunned how the approach has underperformed in bear markets. I do wonder if the backtesting wasn't over a long enough period of time as the years JG used were pretty good investing years, except for the bear market post the internet bubble. And that was not your everyday bear market, there were many "old economy" value stocks that did quite well while Yahoo, and others crashed.

What does everyone else think? Need to wait longer to judge MFI (MIA?) or was it over-hyped (DOA?).


Anonymous said...


dylan said...

Hi Marsh,

I think that once the market begins to show normal slow appreciation then your portfolio will show expected gains. We have had a very poor 5 years in the market. One of those periods that JG says requires belief in the principles of the method. In the 70s there was a similar period of sideways movement in the general market for a number of years but then that slow appreciation began again.
It seems to me you started at an unlucky time. The beginnings of a 5 year dry patch:) But you have shown excellent discipline and, looking from the outside, I see someone who will make really strong returns once the market begins doing what is has done for the last 100 years.
Regards, Dyl

Homer315 said...

I agree with DarwinM.

It depends on how you are going to define success. There are legions of studies that show that low PE or price to book strategies consistently beat the market over long periods of time. MFI is essentially just a tweak on that same version. Some folks believe we are in a secular range bound market (and have been since 2000), and stock returns, low though they may be in such a market, have tended to rely to a large extent on dividends. So in a range bound market you might have annualized gains of only a couple/few percent, and a good portion of that is due to dividends.

Many of the highest ranked MFI stocks are smaller cap ones that have little to no dividend, so they don't even have that type of cushion going for them in such a market. I think these factors help to push MFI portfolios to underperform, especially in cyclical bear markets, and I suspect that they tend to outperform from a capital appreciation standpoint. If I remember correctly, your charts sort of reflect that, in the sense that when the market was moving up, MFI really trounces the market (happened to you pre-crash, and then during 2009) but underperforms during bear markets.

I do think that the system is overhyped in the sense that we shouldn't be expecting 20-30% annualized gains, unless we are in the middle of a secular bull market (which we clearly aren't). But I think that over the long term, MFI will probably perform about the same as many other low PE or PB strategies.

To put it another way, I don't think you can look at MFI as wholly divorced from the stock market. Given the terrible performance of the market the last few years, I suspect there are virtually no long-only strategies that have made much money (as opposed to market neutral or long/short strategies). JG himself even said in one of his interviews that he thought using MFI was appropriate for 100% of your equity portfolio (which to me was recognizing that maybe folks should be in 60% equities, x% bonds, x% cash, etc.) and that MFI will do better than most other equity strategies people are going to use.

Finally, I would also point out that if you could be guaranteed of outperforming the indices by even only 1% a year using a mindless, mechanical approach, wouldn't you accept that at a minimum?

Marsh_Gerda said...

glad to see you agreed with Darwin, he said the article was good... where would we be without babelfish. I have gotten other comments via email, I think my take-away is that MFI may just be MIA, but Homer is closer to right in that our expectations should be to only beat the market by a point or two per year, not the mind-blowing figures from the book... which I believe was too short a period (plus no one fully replicated the same result)


... said...

From a statistical point of view, during sideways markets the best option is bond investment. And now we are practically in sideway market since 1993. Furthermoe, during this period there have been two out of the worst bear markets since last century.
When you say that you currently have 96k dollars out of the 93k you would have by investing in the Russell, you forgot to mention that, actualy, the remaining 96k are MUCH MUCH less of their value, considering both inflation and the missed gain of bond dividends.
I would expect much better results staying "flat" during Very Bearish Periods like 2008. Right: but what is actually a very bearish period? Personally i sue 2 methods:
1) a graphical method: do not buy (even if this is your MFI time to buy stock) if the S&P500 is below is SMA 200 days and the SMA 40 weeks. We are currently in this graphical condition
2) do not buy if the "sentiment" of the markets is very poor (like it was after Lehman Brothers and it is now)
You may argue that, this way, i may loose buying opportunities. I do not think that with a 2-month schedule to buy MFI stocks I would loose that much gain. For example, in 2009 I would have restarted buiyn stocks in June at the very latest. On the other side, you may prevent yourself buying stocks at the beginning or in the middle of a very bearish period.

For the above reasons, I'm currently flat and am maintaining those stock bouth till march 2010.

AndrewsDad said...


My 2 cents from my experiance.... started (kind of) using MFI in late 2007, and these are all rough numbers, with about 80K. a little over a year later had about 120K, during the depths of the sell off, had less than 40K.... went back up to about 105K a month ago... now sitting at 88K.

Now I am the first the admit that 1) I use the MFI list as a resource for ideas and have not come close to following the system to the letter and 2) I have a strong personal bias towards smaller growth stocks and they seem to go way up when the market is good and way down when the market is bad. At least that is my excuse why I have done and am doing so poorly in the contests.

I am getting to the point age wise and responsibility wise where I need to think a little longer and harder about putting my money in the stocks I have in the past.

So back to the question... do I think MFI is MIA or DOA, more MIA I guess. I think those of us that follow the board have seen time and time again that trying to cherry pick from the list just does not seem to work. Seems like it should but just does not. I don't have a copy of the book in front of me but I would guess that J.G. would argue that this has been a challenging time and as long as MFI is doing better than the market averages, then yes, it is working.

There was an old talk show host, Bruce Williams who I remember saying he would rather make 4% on money he could borrow at 3% than make 10% on money he could borrow at 11%. Not sure the anology is perfect but if the market is down and you are less down...

That being said... I have had 100K+ sitting in an eTrade account collecting .000001% interest for the last month or so. Can't decide if I am too afraid to take the plunge, was really savy for sitting out what would have been probably a 10% drop or if I my unbelievable laziness managed to pay off for once.

Anyone have any thoughts on what 10 stocks or so I should dump some money into?