As my readers know, I have been tracking Magic Formula Investing since 2006. On of the things I do to track it is I have an "mfi index" that is comprised of 50 stocks from the official screen. I reconstitute the 50 stocks once a year.
As I said, I have been doing this for 10+ years. So far, the "mfi index" has underperformed. Since 2006, you would be up just shy of 99% if you had invested in the MFI Index.
If you were in the Russell 3000 you would be up 120%. It is always possible I have made mistakes, I am just a guy with a spreadsheet. But I do believe directionally I am right.
Readers know my theories, there are too many stocks nowadays that make the official screen that are not like "Jake's Bubble Gum Shop", meaning that earings in past 12 months are not representative of future earnings (and that really is THE key assumption in the "Little Book That Beats The Market".
Here is a table of how the index has done year by year as well as inception to date:
| 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 | 12.50% | 13.19% | 110.62% | 101.16% |
| 2017 | 9.03% | -2.17% | 120.61% | 98.96% |
2017
While MFI is streaky, 2017 is shaping up as one of the worst years. The Russell 3000 is up about 9% so far and the MFI Index is down about 2%. I thought readers might want to see the individual stocks to understand the poor performance.
| Stock | Initial Price | End Price | Percent Change | Mkt Cap |
| DHX | 6.25 | 2.70 | -56.8% | 313 |
| LFVN | 8.15 | 4.07 | -50.1% | 115 |
| AGTC | 9.35 | 4.83 | -48.4% | 169 |
| CXRX | 2.12 | 1.21 | -42.9% | 108 |
| FPRX | 50.11 | 29.70 | -40.7% | 1,425 |
| ICON | 9.34 | 6.15 | -34.2% | 525 |
| IRMD | 11.10 | 8.15 | -26.6% | 119 |
| SCMP | 13.55 | 10.05 | -25.8% | 621 |
| SSNI | 13.31 | 10.11 | -24.0% | 691 |
| AWRE | 6.10 | 4.75 | -22.1% | 138 |
| TRNC | 13.87 | 11.29 | -18.6% | 505 |
| UIS | 14.95 | 12.40 | -17.1% | 749 |
| AGX | 70.55 | 61.00 | -13.5% | 1,078 |
| SYNT | 19.79 | 17.21 | -13.0% | 1,664 |
| UTHR | 143.43 | 126.05 | -12.1% | 6,520 |
| ESRX | 68.79 | 61.28 | -10.9% | 43,302 |
| IDCC | 90.72 | 81.35 | -10.3% | 3,132 |
| GME | 24.88 | 22.48 | -9.6% | 2,592 |
| BBSI | 63.57 | 57.51 | -9.5% | 464 |
| GILD | 71.06 | 65.48 | -7.9% | 94,668 |
| BPT | 21.90 | 20.50 | -6.4% | 508 |
| DLX | 71.01 | 69.48 | -2.2% | 3,479 |
| MSGN | 21.50 | 21.10 | -1.9% | 1,614 |
| NSR | 33.40 | 33.15 | -0.7% | 1,823 |
| TDC | 27.17 | 27.32 | 0.6% | 3,524 |
| VIAB | 34.94 | 35.21 | 0.8% | 13,928 |
| AMCX | 52.34 | 53.12 | 1.5% | 3,702 |
| PBI | 14.79 | 15.08 | 1.9% | 2,820 |
| CA | 31.26 | 31.93 | 2.1% | 13,126 |
| USNA | 61.20 | 64.45 | 5.3% | 1,490 |
| CSCO | 29.70 | 31.76 | 6.9% | 151,825 |
| MPAA | 26.92 | 29.49 | 9.5% | 532 |
| AVID | 4.40 | 4.88 | 10.9% | 179 |
| TGNA | 21.27 | 23.85 | 12.1% | 4,586 |
| SWHC | 21.08 | 23.70 | 12.4% | 1,186 |
| PDLI | 2.12 | 2.44 | 15.1% | 351 |
| HRB | 22.77 | 26.77 | 17.5% | 4,862 |
| GHC | 509.61 | 600.00 | 17.7% | 2,874 |
| NHTC | 24.10 | 28.44 | 18.0% | 280 |
| MCK | 139.95 | 165.90 | 18.5% | 31,742 |
| RPXC | 10.80 | 13.25 | 22.7% | 531 |
| VEC | 23.85 | 29.74 | 24.7% | 256 |
| MBUU | 19.08 | 23.97 | 25.6% | 338 |
| RGR | 51.86 | 65.50 | 26.3% | 1,000 |
| MYGN | 16.67 | 21.12 | 26.7% | 1,140 |
| HPQ | 14.73 | 18.80 | 27.7% | 25,406 |
| MDCA | 6.55 | 8.40 | 28.2% | 345 |
| MCFT | 14.58 | 18.81 | 29.0% | 272 |
| AAPL | 114.85 | 153.93 | 34.0% | 618,035 |
| ACHI | 2.25 | 3.72 | 65.3% | 240 |
So you have 10 of the 50 stocks down 20% or more already. One can quickly see that 5 of those ten had market caps to start the year under $200m. This ties into one of my themes, the microcap stocks have higher likelihood of being stinkers. And if you want to be successful in investing, the first step to avoid as many catastrophes as possible.
I am not saying never, ever pick a microcap stock. But I am saying that you should do extra due diligence on them to gain comfort that they can continue to grow income and that they are not overly reliant on a single customer (or two).
Ok, off the soapbox.
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