Have A Great Thanksgiving

Happy Thanksgiving Eve

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
2006	11.40%	15.03%	11.40%	15.03%
2007	4.09%	-6.69%	15.96%	7.34%
2008	-37.05%	-37.97%	-27.00%	-33.42%
2009	32.51%	45.18%	-3.27%	-3.34%
2010	18.38%	22.77%	14.50%	18.67%
2011	-0.56%	-10.47%	13.87%	6.25%
2012	16.43%	9.70%	32.57%	16.56%
2013	33.01%	51.70%	76.34%	76.82%
2014	12.26%	12.07%	97.95%	98.15%
2015	0.38%	-8.95%	98.33%	89.37%
2016	7.31%	11.57%	105.52%	99.71%

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:

1. 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.
2. 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.
3. Maybe the financial crisis changed things.  With all the excess liquidity out there and historical low yields has changed dynamics.
4. 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.
5. 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
AAPL	102.97	111.75	8.5%	89.47	587,219
AGX	31.84	62.45	96.2%	28.03	480
BBSI	42.55	56.92	33.8%	22.55	311
BBY	29.29	46.64	59.2%	25.31	10,501
BKE	28.56	25.95	-9.1%	19.95	1,493
BPT	22.50	21.79	-3.1%	11.29	534
BRCD	9.03	12.44	37.8%	7.40	3,800
CALM	45.23	40.10	-11.3%	35.65	2,247
CLCT	14.63	19.90	36.0%	13.67	138
CPLA	45.23	86.70	91.7%	39.06	554
CSCO	26.25	29.95	14.1%	22.46	138,002
DEPO	18.13	20.12	11.0%	12.25	1,097
DLX	53.49	68.11	27.3%	49.46	2,684
ENTA	33.02	32.03	-3.0%	20.39	618
FLR	46.63	52.62	12.8%	39.48	6,716
GHC	480.05	492.20	2.5%	425.14	2,834
GILD	99.54	74.29	-25.4%	71.39	146,624
GME	27.01	23.76	-12.0%	20.10	2,941
GPRO	18.01	9.84	-45.4%	8.62	2,738
HPQ	11.50	15.92	38.4%	8.91	21,359
ICON	6.83	9.76	42.9%	4.67	330
IDCC	48.29	79.68	65.0%	41.01	1,744
IILG	15.24	18.30	20.1%	10.61	897
IQNT	17.26	22.92	32.8%	14.56	599
KING	17.88	18.00	0.7%	12.00	5,640
KORS	40.06	48.73	21.6%	34.83	7,508
LCI	40.12	21.15	-47.3%	16.75	1,459
MCFT	9.94	13.60	36.7%	10.25	247
MSGN	20.80	19.60	-5.8%	14.73	1,554
NHTC	32.74	25.92	-20.8%	15.90	410
NLNK	36.39	13.13	-63.9%	9.23	1,186
NSR	23.97	24.75	3.3%	20.00	1,279
ONE	3.24	5.15	59.0%	1.85	155
OUTR	35.31	52.00	47.3%	24.81	630
PBI	19.76	14.92	-24.5%	14.22	4,089
PDLI	3.43	2.99	-12.9%	2.58	579
PETS	16.47	21.81	32.4%	15.73	348
PII	84.35	87.45	3.7%	67.80	5,635
PPC	19.78	18.30	-7.5%	17.15	5,728
QCOM	48.64	68.41	40.7%	42.24	76,177
RPXC	11.00	10.60	-3.6%	8.60	621
STRA	60.12	72.86	21.2%	42.39	663
TDC	26.42	27.25	3.1%	21.98	3,538
TIVO	8.63	11.34	31.4%	10.26	845
UNTD	11.79	11.00	-6.7%	9.50	174
UTHR	156.61	128.38	-18.0%	97.52	7,517
VDSI	16.73	14.95	-10.6%	12.35	666
VEC	20.89	22.80	9.1%	12.50	221
VIAB	40.13	37.26	-7.1%	30.11	16,382
VNCE	4.58	4.25	-7.2%	3.45	168

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.