Hello everyone.. This Barron's cover is from a long time ago - but it could be just as relevant today. You have found your way to the MFI Diary, a blog I have been keeping since 2006 that tracks my personal experience of using screening methods laid out in "The Little Book That Beats The Market" by Joel Greenblatt.
I also have created an MFI Index that tracks how the stocks on the official screen perform and I create a new portfolio of 50 stocks from the screen once a month. I stay busy. But this has also allowed me to have a very detailed database of how Magic Formula Investing has done and more importantly what has worked and what has not worked.
Keep in mind, I am just a guy with a working knowledge of excel (and a son who is proficient at Python) - so please do not take investment advice from me and do your own due diligence.
This was actually a very good week for me. One of my best weeks (especially on a relative basis) in a long time. Everything seemed to work. For instance, I decided to add TK to my dividend portfolio on Wednesday - and then it immediately went up 17% the next two days. I know, I wish I was always that smart.
Here is how everything stands for me YTD:
| Component | YTD |
| Overall | +6.49% |
| Select | +12.39% |
| Formula | +4.89% |
| Miscellaneous | -6.23% |
| Dividend | +7.83% |
| R3K | +9.26% |
| MFI Index | +2.40% |
Wow. I gained like two points from a week ago. The MFI Index also popped over two points (recall I do have a cash component that acts as ballast). One thing for sure, I am terrible at market timing or predicting when things will go bad. If you go back a year,you'll see when my July 1st 2016 tranche was about to begin, I actually held it back a few days as I was fearful of Brexit fallout.
Glad I moved forward with it as you'll see it is up almost 28% as it heads into final full week. Anyway, I am thrilled to be up 6.5% as we head towards 1/2 point of 2017. Considering 20% cash position, that is fine with me.
Quote of the week : "Enjoy today and don't waste it grieving over a bad yesterday - tomorrow may be even worse."
MFI Select
You'll see as you read my blog that I have two approached towards my magic formula investing - "Select"and "Formula". I began my reboot of MFI in August 2012 after sitting out for a year, licking my wounds and thinking about what worked and what didn't work.
My main takeaway was that the official MFI lists have some stocks (as high as 14% over time) that I call "stinkers", dropping more than 40% in a year. It is key (in my view) to try and avoid as many of these as possible. So when picking stocks, think about the key assumption in this approach (so key it is part of both earnings yield and return on capital) => how good a proxy is income from the past 12 months for the future?
For my MFI Select, frankly I can pick anything I want. Most my picks come from the official screens, but I also run my own screens (which tend to cast a slightly wider net) and I will occasionally pick a stock on my screen and not on official screen (ATHM and YY in current holdings).
Here are my 4 tranches of 5 stocks apiece:
| 8/15/2016 | Start | Current | Dividend | Pct Gain | R3K Gain |
| CSCO | $31.20 | $32.09 | $0.26 | 3.7% | 13.4% |
| GNC | $19.79 | $7.54 | $0.38 | -60.0% | 13.4% |
| VLO | $54.73 | $65.98 | $2.00 | 24.2% | 13.4% |
| MSGN | $16.68 | $22.00 | $0.00 | 31.9% | 13.4% |
| GILD | $79.33 | $70.52 | $1.98 | -8.6% | 13.4% |
| Totals | -1.8% | 13.4% | |||
| 11/15/2016 | Start | Current | Dividend | Pct Gain | R3K Gain |
| MPAA | $26.55 | $28.32 | $0.00 | 6.7% | 13.3% |
| ATHM | $22.61 | $45.47 | $0.00 | 101.1% | 13.3% |
| AMGN | $145.14 | $172.50 | $2.00 | 20.2% | 13.3% |
| RHI | $43.23 | $47.46 | $0.70 | 11.4% | 13.3% |
| CA | $31.11 | $34.98 | $0.51 | 14.1% | 13.3% |
| Totals | 30.7% | 13.3% | |||
| 2/1/2017 | Start | Current | Dividend | Pct Gain | R3K Gain |
| AKRX | $19.10 | $33.53 | $0.00 | 75.5% | 7.3% |
| YY | $41.08 | $58.80 | $0.00 | 43.1% | 7.3% |
| KLAC | $85.11 | $97.95 | $1.08 | 16.4% | 7.3% |
| WNC | $17.65 | $21.65 | $0.06 | 23.0% | 7.3% |
| RGR | $52.75 | $66.60 | $0.92 | 28.0% | 7.3% |
| Totals | 37.2% | 7.3% | |||
| 5/6/2017 | Start | Current | Dividend | Pct Gain | R3K Gain |
| WSTC | $24.15 | $23.21 | $0.00 | -3.9% | 1.8% |
| TGNA | $25.75 | $23.95 | $0.07 | -6.7% | 1.8% |
| TIME | $15.05 | $13.60 | $0.04 | -9.4% | 1.8% |
| MSGN | $23.55 | $22.00 | $0.00 | -6.6% | 1.8% |
| QCOM | $54.93 | $56.91 | $0.57 | 4.6% | 1.8% |
| Totals | -4.4% | 1.8% |
So you can see two tranches (Nov and Feb) are winning against the Russell 3000 benchmark and the other two are losing. But the two winners are winning by more (which means I am up in total) and February and November get greater weight (hypothetically) as have cumulatively been more successful since the reboot. I say hypothetically as in reality I have added money when a tranche hits anniversary - but for illustrative purposes I assume they all started with $25,000 and have just kept rolling gains over (similar to how a mutual funds shows cumulative gains).
Note the lack of stinkers, just GNC right now.
| Category/Tranche | August | November | February | May | Total |
| Initial Investment | 25,000 | 25,000 | 25,000 | 25,000 | 100,000 |
| Current Tranche | -1.8% | 30.7% | 37.2% | -4.4% | 16.7% |
| Previous Tranche | 2.8% | 8.0% | 10.7% | 19.1% | 8.7% |
| Tranche -2 | 11.2% | 69.4% | -14.3% | -25.2% | 10.3% |
| Tranche -3 | 41.4% | 14.2% | 8.5% | 18.3% | 20.6% |
| Tranche -4 | 14.1% | 43.7% | 78.3% | 33.0% | 42.3% |
| MFI Overall Gain | 81.2% | 292.8% | 151.8% | 34.0% | 139.9% |
| Current Balance | 45,299 | 98,191 | 62,945 | 33,489 | 239,924 |
| R3K Current Tranche | 13.4% | 13.3% | 7.3% | 1.8% | 8.9% |
| R3K Overall Gain | 89.5% | 93.0% | 73.6% | 62.4% | 79.6% |
| R3K Balance | 47,386 | 48,257 | 43,404 | 40,599 | 179,645 |
| Annualized IRR | 13.0% | 34.6% | 23.4% | 7.3% | 19.6% |
So this is my cumulative table. A couple key items to point out. At bottom right, you see my overall IRR is still very strong at 19.6%. Maybe not as good as David Tepper, but not shabby either. But if you look by tranche - you see the point I was making, November is at 34.6% and February is 23.4%. So they have been best tranches since the start and now get more weight.
I do not think there is seasonality as everything is held for a year. Now here is a table showing how the $100,000 has grown month by month vs benchmark:
| Date | Differential | MFI Value | R3K Value |
| 12/1/2012 | -2.20% | 99,765 | 101,965 |
| 1/1/2013 | -1.78% | 102,798 | 104,575 |
| 2/1/2013 | -2.26% | 102,594 | 104,856 |
| 3/1/2013 | -2.23% | 102,881 | 105,114 |
| 4/1/2013 | -0.43% | 106,804 | 107,234 |
| 5/1/2013 | 2.00% | 110,423 | 108,423 |
| 6/1/2013 | 4.75% | 115,831 | 111,085 |
| 7/1/2013 | 4.29% | 114,888 | 110,597 |
| 8/1/2013 | 6.91% | 124,799 | 117,889 |
| 9/1/2013 | 10.46% | 124,536 | 114,079 |
| 10/1/2013 | 19.67% | 138,655 | 118,990 |
| 11/1/2013 | 19.75% | 143,514 | 123,764 |
| 12/1/2013 | 23.70% | 150,105 | 126,405 |
| 1/1/2014 | 26.63% | 157,138 | 130,503 |
| 2/1/2014 | 24.70% | 150,619 | 125,918 |
| 3/1/2014 | 25.66% | 158,116 | 132,458 |
| 4/1/2014 | 30.38% | 162,991 | 132,616 |
| 5/1/2014 | 29.65% | 162,428 | 132,779 |
| 6/1/2014 | 31.44% | 167,001 | 135,559 |
| 7/1/2014 | 39.23% | 177,971 | 138,740 |
| 8/1/2014 | 31.13% | 167,054 | 135,922 |
| 9/1/2014 | 35.90% | 177,792 | 141,892 |
| 10/1/2014 | 29.38% | 168,321 | 138,944 |
| 11/1/2014 | 26.14% | 168,810 | 142,666 |
| 12/1/2014 | 30.22% | 176,420 | 146,198 |
| 1/1/2015 | 28.17% | 174,306 | 146,140 |
| 2/1/2015 | 20.63% | 162,833 | 142,201 |
| 3/1/2015 | 25.15% | 175,476 | 150,324 |
| 4/1/2015 | 29.95% | 178,565 | 148,612 |
| 5/1/2015 | 37.31% | 186,655 | 149,348 |
| 6/1/2015 | 51.53% | 202,897 | 151,371 |
| 7/1/2015 | 62.69% | 211,437 | 148,743 |
| 8/1/2015 | 40.75% | 192,117 | 151,369 |
| 9/1/2015 | 36.41% | 178,603 | 142,195 |
| 10/1/2015 | 43.12% | 181,175 | 138,052 |
| 11/1/2015 | 69.02% | 217,959 | 148,936 |
| 12/1/2015 | 73.49% | 223,435 | 149,946 |
| 1/1/2016 | 63.33% | 209,514 | 146,186 |
| 2/1/2016 | 49.49% | 187,428 | 137,934 |
| 3/1/2016 | 56.48% | 194,415 | 137,934 |
| 4/1/2016 | 47.34% | 195,770 | 148,430 |
| 5/1/2016 | 46.38% | 194,301 | 147,923 |
| 6/1/2016 | 51.44% | 201,999 | 150,558 |
| 7/1/2016 | 50.41% | 201,092 | 150,680 |
| 8/1/2016 | 52.72% | 207,223 | 154,501 |
| 9/1/2016 | 67.04% | 222,481 | 155,446 |
| 10/1/2016 | 42.98% | 198,563 | 155,582 |
| 11/1/2016 | 41.86% | 195,726 | 153,863 |
| 12/1/2016 | 45.92% | 202,775 | 156,859 |
| 1/1/2017 | 45.60% | 209,503 | 163,936 |
| 2/1/2017 | 45.20% | 212,330 | 167,146 |
| 3/1/2017 | 48.80% | 222,583 | 173,829 |
| 4/1/2017 | 55.70% | 229,473 | 173,735 |
| 5/1/2017 | 55.80% | 231,497 | 175,712 |
| 6/1/2017 | 53.40% | 230,599 | 177,203 |
| Current | 60.28% | 239,924 | 179,645 |
Back to a 60 point lead. Very nice. You can never get too comfortable. If you look at September of 2016 you'll see I had streaked to a 67 point lead and crashed to 42 point lead in a single month. Seems like a typo, but you can go back and read my September 2016 weekly updates. I recall VEC (which was a big holding) dropped from $30 to $18 and DEPO and GNC crashed as well. Heck, in December 2015 the lead was over 70 point - I recall that January (the Fed was talking about tightening) was very volatile and many stocks (NHTC for one) took huge drops for me.
Here is how individual stocks fared during the week:
| Stock | Last Week | Current | Dividend | Change |
| MSGN | 22.05 | 22.00 | - | -0.2% |
| ATHM | 43.94 | 45.47 | - | 3.5% |
| AKRX | 33.48 | 33.53 | - | 0.1% |
| AMGN | 162.42 | 172.50 | - | 6.2% |
| MPAA | 27.06 | 28.32 | - | 4.7% |
| YY | 54.91 | 58.80 | - | 7.1% |
| RHI | 47.75 | 47.46 | - | -0.6% |
| CA | 31.67 | 34.98 | - | 10.5% |
| WNC | 20.87 | 21.65 | - | 3.7% |
| RGR | 67.75 | 66.60 | - | -1.7% |
| KLAC | 97.70 | 97.95 | - | 0.3% |
| QCOM | 56.82 | 56.91 | - | 0.2% |
| WSTC | 23.21 | 23.21 | - | 0.0% |
| TGNA | 23.90 | 23.95 | - | 0.2% |
| TIME | 13.55 | 13.60 | - | 0.4% |
| VLO | 65.80 | 65.98 | - | 0.3% |
| CSCO | 31.63 | 32.09 | 1.5% | |
| GILD | 64.12 | 70.52 | 10.0% | |
| GNC | 7.56 | 7.54 | -0.3% | |
| Average | 2.4% |
So CA jumped on buyout rumor and GILD just rose with entire IBB.
MFI Formula
Same tables, so I will go a bit faster. Recall that MFI Formula has been going since October 2014. It is entirely formula (quant) driven. I take official 50 over 100m screen and then I throw out the 17 smallest market cap stocks. I then take the subset of remaining stocks that have a dividend yield of at least 2.4%. Finally I allow myself optionality to pitch out one and then I use random number generator to pick my five.
| 7/1/2016 | Start | Current | Dividend | Pct Gain | R3K Gain |
| ILG | $16.76 | $27.86 | $0.54 | 69.5% | 17.3% |
| VIAB | $44.00 | $34.11 | $0.80 | -20.7% | 17.3% |
| CPLA | $53.22 | $85.90 | $1.62 | 64.4% | 17.3% |
| HRB | $23.62 | $31.25 | $0.90 | 36.1% | 17.3% |
| PBI | $17.69 | $15.08 | $0.75 | -10.5% | 17.3% |
| Totals | 27.8% | 17.3% | |||
| 10/3/2016 | Start | Current | Dividend | Pct Gain | R3K Gain |
| CPLA | $58.15 | $85.90 | $1.23 | 49.8% | 14.2% |
| LDOS | $43.01 | $53.56 | $0.64 | 26.0% | 14.2% |
| GME | $27.70 | $20.65 | $1.13 | -21.4% | 14.2% |
| PBI | $18.15 | $15.08 | $0.56 | -13.8% | 14.2% |
| CSCO | $31.72 | $32.09 | $0.81 | 3.7% | 14.2% |
| Totals | 8.9% | 14.2% | |||
| 12/30/2016 | Start | Current | Dividend | Pct Gain | R3K Gain |
| GILD | $71.69 | $70.52 | $1.04 | -0.2% | 9.1% |
| HPQ | $15.00 | $17.80 | $0.40 | 21.3% | 9.1% |
| TGNA | $21.33 | $23.95 | $0.21 | 13.3% | 9.1% |
| CA | $31.99 | $34.98 | $0.51 | 10.9% | 9.1% |
| SYNT | $19.79 | $16.51 | $0.00 | -16.6% | 9.1% |
| Totals | 5.8% | 9.1% | |||
| 4/1/2017 | Start | Current | Dividend | Pct Gain | R3K Gain |
| BKE | $18.45 | $16.80 | $0.25 | -7.6% | 3.4% |
| CSCO | $33.76 | $32.09 | $0.29 | -4.1% | 3.4% |
| GILD | $67.50 | $70.52 | $0.52 | 5.2% | 3.4% |
| OMC | $85.53 | $82.37 | $0.55 | -3.1% | 3.4% |
| SYNT | $16.76 | $16.51 | $0.00 | -1.5% | 3.4% |
| Totals | -2.2% | 3.4% |
So while the July tranche has been good, the other three are trailing. This is pretty consistent with MFI in total over the past year.
| Category/Tranche | October | January | April | July | Total |
| Initial Investment | 249,820 | 249,939 | 250,180 | 249,728 | 999,667 |
| Current Tranche | 8.9% | 5.8% | -2.2% | 27.8% | 7.5% |
| Previous Tranche | 5.5% | 9.3% | 25.2% | -12.5% | 8.1% |
| Tranche -2 | 0.5% | 11.0% | -0.2% | - | 2.8% |
| MFI Overall Gain | 15.4% | 28.3% | 22.1% | 11.8% | 19.4% |
| Current Balance | 288,285 | 320,615 | 305,506 | 279,284 | 1,193,690 |
| R3K Current Tranche | 14.2% | 9.1% | 3.4% | 17.3% | 11.0% |
| R3K Overall Gain | 29.0% | 22.0% | 20.7% | 17.0% | 22.2% |
| R3K Balance | 322,240 | 304,893 | 302,002 | 292,180 | 1,221,316 |
| Annualized IRR | 5.4% | 10.5% | 9.3% | 5.8% | 7.8% |
So the 7.8% IRR is not a disaster, but I am trailing benchmark by a bit. But I still believe in this approach and I will be increasing stakes by about 40% in July.
| Date | Differential | Value | R3K Value |
| 10/1/2014 | 0.00% | 100,000 | 100,000 |
| 11/1/2014 | 1.63% | 102,288 | 100,658 |
| 12/1/2014 | 0.30% | 101,375 | 101,075 |
| 1/1/2015 | -0.33% | 100,664 | 100,995 |
| 2/1/2015 | 1.67% | 101,281 | 99,611 |
| 3/1/2015 | 3.62% | 106,073 | 102,454 |
| 4/1/2015 | 5.09% | 106,781 | 101,695 |
| 5/1/2015 | 5.78% | 107,859 | 102,077 |
| 6/1/2015 | 5.08% | 108,213 | 103,134 |
| 7/1/2015 | 4.82% | 106,423 | 101,604 |
| 8/1/2015 | 3.71% | 107,112 | 103,404 |
| 9/1/2015 | 4.38% | 101,523 | 97,139 |
| 10/1/2015 | 6.39% | 100,703 | 94,312 |
| 11/1/2015 | 2.93% | 104,835 | 101,907 |
| 12/1/2015 | -3.48% | 99,443 | 102,926 |
| 1/1/2016 | -3.36% | 96,830 | 100,012 |
| 2/1/2016 | -0.72% | 93,797 | 94,367 |
| 3/1/2016 | 4.07% | 98,588 | 94,367 |
| 4/1/2016 | 0.34% | 102,371 | 101,548 |
| 5/1/2016 | -1.91% | 99,774 | 101,200 |
| 6/1/2016 | -0.42% | 103,145 | 103,568 |
| 7/1/2016 | -0.19% | 103,022 | 103,216 |
| 8/1/2016 | 2.56% | 109,419 | 106,857 |
| 9/1/2016 | -0.34% | 106,704 | 107,048 |
| 10/1/2016 | -0.85% | 106,377 | 107,230 |
| 11/1/2016 | 0.42% | 105,421 | 105,003 |
| 12/1/2016 | 1.62% | 110,705 | 109,088 |
| 1/1/2017 | 1.57% | 113,406 | 111,832 |
| 2/1/2017 | 1.32% | 114,809 | 113,486 |
| 3/1/2017 | -5.09% | 112,930 | 118,024 |
| 4/1/2017 | -1.86% | 116,227 | 118,091 |
| 5/1/2017 | 1.11% | 120,403 | 119,296 |
| 6/1/2017 | -2.65% | 117,824 | 120,472 |
| Current | -2.76% | 119,369 | 122,133 |
You can see month by month it has been a struggle to gain any traction. The universe of stocks for this approach is much smaller. And if a few (like GME, PBI and BKE) struggle it is hard to keep a lead.
| Stock | Last Week | Current | Dividend | Change |
| CPLA | 89.75 | 85.90 | - | -4.3% |
| GILD | 64.12 | 70.52 | - | 10.0% |
| SYNT | 16.42 | 16.51 | - | 0.5% |
| CSCO | 31.63 | 32.09 | - | 1.5% |
| TGNA | 23.90 | 23.95 | - | 0.2% |
| HPQ | 17.35 | 17.80 | - | 2.6% |
| CA | 31.67 | 34.98 | - | 10.5% |
| PBI | 15.25 | 15.08 | - | -1.1% |
| OMC | 83.31 | 82.37 | - | -1.1% |
| BKE | 17.35 | 16.80 | - | -3.2% |
| LDOS | 53.98 | 53.56 | - | -0.8% |
| ILG | 27.71 | 27.86 | - | 0.5% |
| VIAB | 35.07 | 34.11 | - | -2.7% |
| HRB | 29.92 | 31.25 | - | 4.4% |
| GME | 20.59 | 20.65 | - | 0.3% |
| - | ||||
| Average | 1.2% |
A solid week - but not as good as my Select of the MFI Index. CPLA is a big position and has really pulled back recently.
Dividends and Miscellaneous
As this is MFI Diary, I will spend just a small amount of time here. I had pulled back my dividend portfolio a bunch earlier in the year as I was seeing shadows. That was a mistake. I did buy back my SBRA and PSXP. I will likely buy back my CSQ and AOD on any pullback and move forward.
Every day I get closer to retirement, so I am thinking more and more about income stream. I like the names I have and will likely over the rest of 2016 look for opportunities to increase my positions Along with CSQ and AOD). It is a pretty high yielding portfolio (will be north of 7% with my plans I have laid out). It would be naive to think that such a high yield does not contain risk. I do try and at least spread my risk - I am really NOT trying to get rich, but rather create a reliable income stream.
For a long time, I just had all these names on automatic reinvestment. I have turned that off for most of them. In part this is because I think market is fully valued.
| Stock | Initial | Current | Div/Sh | Gain/Loss | Yield |
| TK | 5.24 | 6.25 | - | 19% | 3.5% |
| PSXP | 48.20 | 48.68 | - | 1% | 4.8% |
| TGONF | 10.47 | 12.98 | 1.97 | 43% | 5.3% |
| FDEU | 18.21 | 19.04 | 0.12 | 5% | 7.6% |
| SBRA | 24.01 | 24.95 | 0.43 | 6% | 6.9% |
| NRZ | 16.51 | 16.59 | - | 0% | 12.1% |
| JQC | 7.87 | 8.55 | 0.93 | 21% | 7.4% |
| DSL | 18.49 | 20.86 | 1.86 | 23% | 8.6% |
| RILY | 13.85 | 17.50 | - | 26% | 1.8% |
| DHF | 3.19 | 3.50 | 0.14 | 14% | 9.3% |
| O | 24.91 | 55.28 | 20.12 | 203% | 4.6% |
| OIBAX | 5.09 | 5.85 | 2.38 | 62% | 4.0% |
Recall this is in descending order of value. Some of recent purchases have fared well (TK, FDEU and RILY). The earlier sale of SBRA and PSXP and then buying back was actually "successful" as I bought back at lower prices than I sold. That may be more difficult on AOD and CSQ as they are each up by about 8.5%.
In my Misc portfolio - my play on rebalancing the Junior miner gold index has worked well. I sold one tranche at a 9% gain (though had I waited, it went up by another 5%). Then my second (but sadly smaller) tranche I still own and is up almost 9% as well.
I am on the fence about my BAC warrants. At one time my position here was so large it was equal by #2 and #3 positions combined. I have sold a bit more than 50% of my position and it is now my #3 position (behind GILD and CSCO). With stress test results coming out, I am tempted to buy back the shares I sold a month ago at $11.20. We will see.
My other sizable position here is NXPI - which is being bought by QCOM for $110. It is $109.98, so one would say upside is limited. But my view is downside is limited as the entire semi sector is up 20 to 30% since deal was announced => decent chance of a bump in price if shareholders do not tender shares.
But before you go all in on my Misc plays, keep in mind that I am down over 6% YTD on these more speculative picks. I maintain it as my smallest of 4 investing approaches for a reason (I have historically not been very good at it). I did comment on the lessons from "The Undoing Project", a book that explored the fact that economists are mistaken in assuming we are totally rational about economic decisions.
Have a great weekend.
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