Value Stocks vs MFI

Value Stocks Versus MFI

I think we can all agree that stocks that meet the magic formula screen are generally "value stocks".  The mantra is good stocks, cheap.  Valuestockgeek on twitter shared an interesting table:

What this table shows is the number of low EV/EBIT stocks by year and how they performed against S&P 500.  When the market is "cheap", like 2009 or 2001, you tend to have more stocks meeting this criteria.  When the market is stretched, like 1999, 2007 or 2017, you tend to have fewer.

It is also telling that Greenblatt wrote his book in 2006.  Look at the best years for value stocks on relative basis: 2000, 2001, 2002 and 2003 are amongst the very very best.  So it may not be totally surprising that he had the stellar backtesting results he had and it has been a bit more of a slog since then.

He makes the point that when there are fewer stocks in that bucket, it is less likely that in aggregate they outperform.  I think this makes intuitive sense.  Now I thought it would be interesting to overlay my MFI Index results with this table.  Are the best years for MFI the same as the best years for value stocks (on relative basis)?

	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	17.60%	2.41%	130.09%	103.59%

You can see the best years for index were 2013 and 2009. Followed by 2010 and 2006.   The worst years were 2011, 2017, 2007 and 2015. Well bingo on 2009 and 2013.  They are right at top of chart.  I think the 2011 disconnect (high on value chart and poor for MFI) was all the reverse merger chinese stocks that year.  

For bad years, double bingo on 2007 and 2017.  They suck for MFI and they had very low proportions of cheap stocks.

So we seem to have reasonable alignment.  What does this all mean?  I guess in times when the market is cheap (like 2009), you could either invest more $ (takes courage) or have a greater focus on stocks with higher earnings yield.  In times when market is stretched (Like now), you could take some $ off table or you could focus less on Earnings yield and more on return on invested capital.  That does make some intuitive sense, I have been avoiding somewhat "value" stocks that are shrinking.

Hmm, some stuff to noodle over.