A Simple Model

Is It As Simple As Using A Simple Model???

The thoughts from Joel Greenblatt and Tobias Carlisle from the Deep Value Summit video corpraider posted here the other day really has me thinking.

1. Do I make it too complicated?
2. Do I really add value above & beyond the model?
3. Should I change my approach?

I have been relatively successful lately, so there is a decent argument to just keep what I am doing.

2014:  I am up 15.1%, beating the index by about 6 points.

2013:  I was up 45% (vs 33% for benchmark)

2012: I was up 18% (16.4% for benchmark) 

2011 was marred by my being too involved in Chinese Reverse Merger stocks.

But to be honest, I make quite a few "snap" decisions, that end up generally not working well.  I have enough core positions and allocate a relatively small amount to those snap plays that I overcome them.  So why do I do it?  I expect I enjoy the thrill of a little mad money. I suppose like others, I want that occasional home run.

What Would Be a Potential Simple Model?

 On the MFI side, that seems pretty obvious.  I have shown that stocks with market caps above $750m with a decent dividend yield (26%+), have done very very well since 2006 (essentially 19% a year while R3K has compounded at 7.4% annually). So I could take the leap of faith and try that in November and simply randomly pick my five stocks.

Stock	Mkt Cap	Yield
CSCO	125,617	2.9%
CA	12,380	3.5%
COH	9,967	3.7%
BAH	3,400	15.4%
BKE	2,381	4.2%
PDLI	1,739	6.0%
RGR	956	4.1%

As a note, these 6 stocks were up 1.1% last week. It feels restrictive, but it is a simple formula.

Dividend Simple Formula

This could be a fall out of my top 200 rankings.  Perhaps 5 picks changed once a year from my top 200 list. To be picked I would take the stocks with yields over 4% that have the highest earnings yield.  That simple. I would retain all the ones I have right now that are monthly payers - but sell the others (eventually). Here are my dividend holdings:

Stock	Shares	Ann Dividend / Share	Yield
AOD	14,186	0.68	7.6%
BBEP	5,713	2.01	8.9%
CSQ	7,001	1.00	8.3%
EXETF	6,000	0.48	6.1%
FSC	8,395	1.10	11.2%
GPS	2,000	0.88	2.0%
NADL	6,366	0.96	9.6%
NTC	6,784	0.68	5.4%
O	600	2.17	4.8%
OIBAX	4,147	0.29	4.7%
TCMCF	4,903	1.60	10.8%
TGONF	7,000	0.62	5.4%
TIME	2,000	0.80	3.4%
TLM	9,500	0.27	2.7%
TNH	500	12.04	8.1%
TPVG	5,128	1.20	7.8%

So by my definition, I would sell TPVG, TNH, TLM, TIME, TGONF, NADL and GPS.

I would buy (note these stocks are more for illustrative purposes, the list is a bit out-dated).

Ticker	Rank	Stock Price	Market Cap	Earnings Yield	Dividend Yield
PDLI	2	9.71	1,721	20%	6.11%
SGU	62	5.76	331	19%	5.91%
CTCM	13	9.51	1,484	18%	6.83%
TEO	137	18.94	3,671	17%	8.28%
RGR	27	50.80	1,013	16%	4.08%
ATAI	42	4.60	104	16%	8.76%
TNH	14	151.74	2,807	14%	6.74%

(note I listed a couple extras)

It doesn't really make sense to have rules for "discretionary" portfolio. But I could say no more than 5 positions and they cannot be more than 20% of my total.

Hmmm, stuff to think about.  While it might be difficult to let go and just trust "the force", there is a real chance I would have better results with less effort - that seems worthwhile.