Good morning gentle readers. Cold start here in New England, mid 20s. But I am cozy, taking the day off and drinking a fresh cup of coffee. Just tried a new brand, Cafe Bustelo (Café Bustelo), and I highly recommend it.
I am thankful to have my family all together and we are all relatively healthy (although I hear my wife coughing upstairs). Looking forward to tomorrow, we are all in charge of cooking a dish, so the kitchen will be active.
On the investing side, this has been a successful year for me. Easily the largest $ gain I have ever had in a year (considering everything - not just my active portfolio I track here). I have a graph here that shows gains over the past two decades:
So just compounding away. These gains since the bull market started in 2009 kind of illustrate why I am considering being more defensive as I approach age 60. Funny, that drop is 2008 looks small right now in hindsight, but at the time it was very large.
MFI Index Performance
As my readers know, I maintain an MFI Index of fifty stocks that I reconstitute every year. Here is a table showing by year how it has done against Russell 3000 and also inception to date (ITD):
|Annual||Inception to Date|
|Year||Russell||MFI||Russell ITD||MFI ITD|
So you can see it has been lumpy. MFI has won only 5 of the 11 years. In total, close to a push but MFI is trailing by 6 points.
People wonder why MFI did so well in Greenblatt's back testing, but that has not been replicated here. Here are some thoughts:
- Maybe the world is changing more. It seems there are more major disruptors. Recall the key assumption in MFI is that trailing 12 month earnings is a good proxy for the next twelve months. For BKE, that has not been true as sales drop 6% a year due to Amazon for example.
- Maybe my usage of $100m and greater is too low. My studies have shown that a subset of the stocks over $100m (then taking those greater than $600m) does better. Although Greenblatt's book did show that lowering the market cap gave higher returns.
- Maybe the financial crisis changed things. With all the excess liquidity out there and historical low yields has changed dynamics.
- Maybe a few sectors have distorted the numbers. I know For Profit Education and Chinese Reverse Merger stocks hurt the results quite a bit. One "issue" with MFI is that if a sector is out of favor it can be highly represented in lists. Of course, when something changes then that can be beneficial as we saw with the pharmas and for profit education post the Trump victory.
- Maybe 11 years isn't enough time... Greenblatt used 17 and warns that it is difficult to stay the course.
I do not have answers. But I do have beliefs. And
- I do believe that conceptually MFI should work.
- I do believe that it can put stocks on the list as "false positives", think bio tech stocks with one large royalty payment that is not sustainable.
- I do believe that by going with slightly larger cap stocks and stocks that pay dividends, one can weed out some of the false positives.
- I do believe that it helps to check our personal biases at the door. That is why 1/2 my investments work by formula and randomness, as crazy as that seems.
Current MFI Index
Since I discuss my MFI Index, here is where the individual stocks stand today. I will reconstitute at year end (note initial price is adjusted for dividends):
|Stock||Initial Price||End Price||Percent Change||52 week low||Mkt Cap|
Now what stocks on this list were "false positive"? NLNK for sure. Just weeding them out takes you to 13.2% (from the 11.6% above). I'd also throw PDLI into unsustainable category, but you get the point.
Have a great TG everyone.