Weekend Update 3/11/17

Weekend Update

Tough call this week for me to go with "Spring Ahead" or "Baby It's Cold Outside".  A frigid 9 degrees this morning with winds going from 15 to 25 mph.  I think I'll stay inside most of the day.

You have found your way to the MFI Diary.  This is my blog where I discuss many things related to "The Little Book That Beats the Market" by Joel Greenblatt.  I have been writing this blog since early 2006 and have tracked my performance with real money and tracking portfolios based on the official Magic Formula Investing (MFI) website.  I also have created an MFI Index, which is fifty MFI stocks and is reconstituted once a year.

Finally, I should mention that I am just a guy with a spreadsheet.  Not a CFA, not an expert... just a guy.  So please use what I write for information, but do your own diligence in making stock decisions.

So welcome!

The Past Week

It is funny, I was down about 1% on the week, but it did not seem that way. I guess because Friday was good.  Here is a table showing my YTD numbers by my investing approach.  As I often note, these include a cash component (around 20%) as I have plans to move more cash into my portfolios during 2017.

Component	YTD
Overall	+4.61%
Select	+6.32%
Formula	+1.05%
Miscellaneous	+11.93%
Dividend	+3.48%
R3K	+5.75%
MFI Index	-0.30%

So overall, I am up 4.61%, which trails the Russell 3000 - but when you consider my cash component, that is ok with me.  You will see I have two MFI approachs: Select and Formula.  Select is doing very nicely (even with the cash) at 6.32%.  The Formula approach is not a disaster, but no victory lap either.  Then you see the MFI Index actually at negative 30 bps. Not strong so far this year for MFI in total.  My dividend approach was down 1.4%, I'd guess the probability of upcoming rate hikes is taking a toll on more bond-like holdings.

Here is a table of the MFI Index since 2006:

	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	5.75%	-0.30%	116.98%	100.85%

So just buying 50 MFI stocks at the start of each year and holding for a year is frankly trailing.  I mean to be down 100.85% to 116.98% is probably a percentage point a year, so not a disaster.  I have discussed many times the causes for the underperformance, or better description the sources of the underperformance.  Biotech names, Chinese reverse mergers names and trusts (like BPT) have been a drag.  It is because they often do not fit the mold of Jason's Bubble Gum Shop from Greenblatt's book - ie last year's income is not a good proxy for future income and/or they do not have the ability to reinvest and build more bubble gum shops.

Ok, off my soap box.

MFI Select

I have two groups of MFI stocks with real money.  The first (and oldest) is MFI Select. This is 4 baskets of 5 stocks that I buy and hold for a year.  I have been doing this since my reboot in August 2012.  

This approach has done very well for me.  Note I am trying to avoid stocks that are on the screen, but in my view are not a true Jake's Bubble Gum Shop (ie a one hit wonder).  To be fair,  I have also had several stocks that did (going with Scottish accent) verra verra well.

Here is my month by month performance, assuming I put in $100,000 spread over the 4 baskets evenly:

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	47.19%	209,503	162,313
2/1/2017	47.65%	212,330	164,675
3/1/2017	52.99%	222,583	169,589
Current	55.93%	225,727	169,797

Obviously in total, this table is very good.  If I had started with $100,000 spread over the four tranches, I'd be at $225,727 now.  That is almost a 20% annual internal rate of return.  I will be the first to say it is not healthy to look at this weekly (probably not even monthly either).  Some of the stocks can be a wee bit volatile, so week by week, month by month, it can churn the stomach a bit. It can also be difficult to follow the rules - I am often tempted to sell something based on today's headlines (GNC and GILD of late come to mind).  But I do think it is important to check your emotions at the door. Step away from the batter, as I like to say.

This is one of many quotes I try to read and remember from Walter Schloss.  People here need to remember that the advantage you have as a small investor is that you can be patient.  If you are not buying on margin, you do not need to sell or create so-called window dressing.  You can never be faster than High Frequency Traders, but you can be more patient.  Ok, getting off the second soap box.

Here are my current holdings:

5/6/2016	Start	Current	Dividend	Pct Gain	R3K Gain
BRCD	$7.97	$12.39	$0.17	57.5%	18.2%
CBI	$37.82	$30.32	$0.00	-19.8%	18.2%
HSII	$18.51	$24.20	$0.39	32.8%	18.2%
RHI	$38.51	$48.21	$0.90	27.5%	18.2%
UTHR	$107.99	$149.45	$0.00	38.4%	18.2%
Totals				27.3%	18.2%
8/15/2016	Start	Current	Dividend	Pct Gain	R3K Gain
CSCO	$31.20	$34.26	$0.26	10.6%	9.8%
GNC	$19.79	$7.51	$0.38	-60.1%	9.8%
VLO	$54.73	$66.57	$1.30	24.0%	9.8%
MSGN	$16.68	$22.90	$0.00	37.3%	9.8%
GILD	$79.33	$68.19	$0.94	-12.9%	9.8%
Totals				-0.2%	9.8%
11/15/2016	Start	Current	Dividend	Pct Gain	R3K Gain
MPAA	$26.55	$27.86	$0.00	4.9%	9.6%
ATHM	$22.61	$35.61	$0.00	57.5%	9.6%
AMGN	$145.14	$181.44	$1.00	25.7%	9.6%
RHI	$43.23	$48.21	$0.46	12.6%	9.6%
CA	$31.11	$32.40	$0.26	5.0%	9.6%
Totals				21.1%	9.6%
2/1/2017	Start	Current	Dividend	Pct Gain	R3K Gain
AKRX	$19.10	$22.66	$0.00	18.6%	3.9%
YY	$41.08	$46.81	$0.00	13.9%	3.9%
KLAC	$85.11	$93.20	$0.54	10.1%	3.9%
WNC	$17.65	$20.71	$0.00	17.3%	3.9%
RGR	$52.75	$52.15	$0.00	-1.1%	3.9%
Totals				11.8%	3.9%

As you can see, generally doing quite bonny (ok, I am reading a book set in Scotland).  People have asked, "how do I select my MFI stocks?".  My first comment would be I am just a guy with a spreadsheet, so please, please do your own work.  But I use the official MFI site and I run my own top 200 list with some regularity (which I often publish here).  I then wean down my picks (trying to think about Jason Bubble Gum Shop principles).  I make mistakes, but I am really really trying to avoid disaster stocks.  I am not trying to hit home runs. I love a stock like RHI from May. Pretty stable earnings, not big and not small, pays a dividend.  But at the time was cheap enough to make the list.  I will pick Chinese names (like YY and ATHM) occasionally, but I did lose my shirt on reverse merger names so I keep these to a minimum (like 2 of the 20).

Here is a table showing a ton of statistics:

Category/Tranche	August	November	February	May	Total
Initial Investment	25,000	25,000	25,000	25,000	100,000
Current Tranche	-0.2%	21.1%	11.8%	27.3%	15.0%
Previous Tranche	2.8%	8.0%	10.7%	-25.2%	-2.7%
Tranche -2	11.2%	69.4%	-14.3%	18.3%	21.2%
Tranche -3	41.4%	14.2%	8.5%	33.0%	24.3%
Tranche -4	14.1%	43.7%	78.3%	0.0%	34.0%
MFI Overall Gain	84.1%	264.0%	105.1%	49.7%	125.7%
Current Balance	46,014	91,008	51,282	37,422	225,727
R3K Current Tranche	9.8%	9.6%	3.9%	18.2%	10.4%
R3K Overall Gain	83.5%	86.8%	68.0%	57.2%	69.8%
R3K Balance	41,779	46,712	42,008	39,298	169,797
Annualized IRR	14.3%	34.9%	19.1%	11.0%	19.8%

You can see the struggle varies from year to year.  Tranches I picked 4 years ago (that are closed) were up 34% (good start).  Tranches I picked three years ago were up 24.3%.  But my closed tranches from a year ago were down 2.7%.  That seems to be rebounding with my current open tranches (up 15%).  These are not static, when I start new May tranche, the 33% from May Tranche -3 will move to Tranche -4.  You can also see that for whatever reason, my November picks have been outstanding.  I do not believe there is seasonality.  That is just chance at work in my view.

Finally,  here are how my stocks did this past week:

Stock	Last Week	Current	Dividend	Change
RHI	47.49	48.21	-	1.5%
ATHM	33.27	35.61	-	7.0%
CA	32.48	32.40	-	-0.2%
AMGN	180.20	181.44	-	0.7%
MPAA	28.27	27.86	-	-1.5%
AKRX	24.12	22.66	-	-6.0%
MSGN	22.30	22.90	-	2.7%
VLO	66.08	66.57	-	0.7%
BRCD	12.47	12.39	-	-0.6%
YY	44.49	46.81	-	5.2%
CSCO	34.29	34.26	-	-0.1%
KLAC	90.42	93.20	-	3.1%
RGR	48.75	52.15	-	7.0%
GILD	70.74	68.19	-	-3.6%
CBI	32.43	30.32	-	-6.5%
GNC	8.53	7.51	-	-12.0%
WNC	21.67	20.71	-	-4.4%
Average				-0.4%

As I often mention, the average here is a straight average - so it does not reflect that RHI is in two tranches nor that I have more $ in some holdings (ie November) than others.

MFI Formula

Ok, I will go with same tables same order but less wordy.  Note that MFI Formula stocks are picked via a formula and random number generator.  If I backtest this approach, it has been terrific.  Unfortunately, since I started with real $ (as you will see) in October 2014 it has been just so-so.

My "Formula" (pretty funny as I should call in Formula Squared as it is a formula within a formula) is to start with the official MFI list (top 50 stocks over $100m market cap).  I then throw out the bottom 1/3 in market cap (so now just 34 stocks).  I then throw out everything that has a dividend yield of under 2.4% (I do count special dividends).  That generally gets me down to 10 or so stocks.  I finally allow myself to discard one stock (I went with PDLI for a long time as i felt earnings were not sustainable [good call] but once or twice threw out OUTR [bad call]).  I then randomly pick five names.  This can (and does) cause me to have the same stock in several tranches.

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
Current	-4.17%	114,048	118,216

4/1/16 Stocks	Start	Current	Dividend	Pct Gain	R3K Gain
CALM	$51.27	$38.80	$0.44	-23.5%	18.1%
HPQ	$12.10	$17.39	$0.51	47.9%	18.1%
TIME	$15.24	$19.10	$0.76	30.3%	18.1%
ILG	$13.85	$18.24	$0.51	35.3%	18.1%
XPER	$30.79	$33.70	$0.80	12.1%	18.1%
Totals				20.4%	18.1%
7/1/2016	Start	Current	Dividend	Pct Gain	R3K Gain
ILG	$16.76	$18.24	$0.39	11.2%	13.6%
VIAB	$44.00	$43.73	$0.40	0.3%	13.6%
CPLA	$53.22	$77.80	$1.21	48.5%	13.6%
HRB	$23.62	$23.73	$0.66	3.3%	13.6%
PBI	$17.69	$13.29	$0.56	-21.7%	13.6%
Totals				8.3%	13.6%
10/3/2016	Start	Current	Dividend	Pct Gain	R3K Gain
CPLA	$58.15	$77.80	$0.82	35.2%	10.6%
LDOS	$43.01	$52.81	$0.00	22.8%	10.6%
GME	$27.70	$25.18	$0.75	-6.4%	10.6%
PBI	$18.15	$13.29	$0.38	-24.7%	10.6%
CSCO	$31.72	$34.26	$0.52	9.6%	10.6%
Totals				7.3%	10.6%
12/30/2016	Start	Current	Dividend	Pct Gain	R3K Gain
GILD	$71.69	$68.19	$0.00	-4.9%	5.6%
HPQ	$15.00	$17.39	$0.13	16.8%	5.6%
TGNA	$21.33	$26.23	$0.14	23.6%	5.6%
CA	$31.99	$32.40	$0.26	2.1%	5.6%
SYNT	$19.79	$17.54	$0.00	-11.4%	5.6%
Totals				5.3%	5.6%
Category/Tranche	October	January	April	July	Total
Initial Investment	249,820	249,939	250,180	249,728	999,667
Current Tranche	7.3%	5.3%	20.4%	8.3%	9.7%
Previous Tranche	5.5%	9.3%	-0.2%	-12.5%	1.1%
Tranche -2	0.5%	11.0%	-	-	2.9%
MFI Overall Gain	13.7%	27.7%	20.1%	-5.2%	14.1%
Current Balance	284,126	319,101	300,535	236,720	1,140,482
R3K Current Tranche	10.6%	5.6%	18.1%	13.6%	12.0%
R3K Overall Gain	24.9%	18.1%	16.8%	13.3%	18.3%
R3K Balance	311,926	295,089	292,268	282,859	1,182,142
Annualized IRR	5.4%	11.8%	9.9%	-3.1%	6.0%

Yeah, the 6% annualized IRR is a bummer.  But I plan to stick with it - actually will add $ in April.

Stock	Last Week	Current	Dividend	Change
CPLA	76.95	77.80	0.41	1.6%
HPQ	17.35	17.39	-	0.2%
ILG	18.55	18.24	0.15	-0.9%
PBI	13.57	13.29	-	-2.1%
GILD	70.74	68.19	-	-3.6%
CA	32.48	32.40	-	-0.2%
SYNT	17.61	17.54	-	-0.4%
TGNA	25.92	26.23	-	1.2%
XPER	35.40	33.70	-	-4.8%
LDOS	53.69	52.81	-	-1.6%
TIME	18.45	19.10	-	3.5%
CSCO	34.29	34.26	-	-0.1%
GME	25.28	25.18	0.38	1.1%
HRB	20.98	23.73	0.22	14.2%
CALM	37.40	38.80		3.7%
VIAB	42.31	43.73		3.4%
Average				1.0%

HRB had good earnings.  TIME is taking bids, could go as high as $22.

Dividend Portfolio

Those of you who only care about MFI can sign off now.  I have two other investing approaches in play.  The first is dividends, which is my attempt to build an portfolio that will produce an income stream for me as I rapidly approach retirement.

These securities are intended to be buy and hold and I reinvest dividends on many of them.  There is nothing that makes investing more real for me that getting regular dividend checks, especially when they are every increasing through compounding.  So it is hard to benchmark my results against the market as I have stock and bond funds.  I do not even really focus on overall gains in "value", but rather I focus on gains in income stream.  With reinvested dividends plus extra cash allocations over the years, it is an impressive chart.

Here are my holdings from start of year (I did sell SBRA and PSX):

Dividend Stocks	Start	Current	Divvy	Overall Pct Gain	Weekly Pct Gain	1/1/17 Price	% Chg Since 1/1/17
CSQ	9.13	11.01	2.44	47.4%	-1.6%	10.27	9.3%
AOD	7.64	8.16	1.77	30.0%	-1.2%	7.58	8.8%
SBRA	22.46	25.74	0.41	16.4%	0.0%	24.42	5.4%
PSXP	47.04	52.73	1.08	14.4%	-4.7%	48.64	9.5%
TGONF	10.24	12.41	2.02	41.0%	0.2%	12.14	3.6%
JQC	7.85	8.81	0.74	21.6%	-2.2%	8.85	0.6%
PSX	80.00	78.90	3.51	3.0%	0.0%	86.41	-8.0%
DSL	18.45	19.64	1.30	13.5%	-3.0%	18.99	4.9%
GLDI	10.63	9.21	0.86	-5.3%	-2.6%	8.94	4.5%
PEO	20.49	19.19	0.10	-5.8%	-3.0%	20.17	-4.4%
O	24.43	57.39	19.78	215.9%	-4.9%	57.48	0.5%
DHF	3.19	3.29	0.09	5.8%	-4.9%	3.36	-0.2%
OIBAX	5.08	5.68	2.34	58.0%	-0.5%	5.61	2.0%
Totals				25.0%			3.5%

Looking at the weekly pct gain column, you can see it was not a great week.  I think the only thing that helped was having sold a few names (SBRA was down 3.6% and PSX was up almost 1%).  But that is okay.  The purpose here is income.  Reinvested dividends.  I will be adding to these holdings during 2017, especially if we get some pullbacks.

Miscellaneous

While the first three portfolios are all roughly the same in size, my miscellaneous portfolio is the smallest (also best performing so far).  You might say, why not put more here?  I do think about it, but over time this has not always done so well as i have at times swung for the fences and definetly struck out.  I am starting to build more of an approach here (less ad hoc) based on some newsletters I am reading regarding merger arbitration (so SYT has become one of my larger holdings).

But I do take more risk here, warrants, options micro caps.  So I do not share much beyond my results as I do not want people to blindly follow me.  But BAC warrants, some gold plays and arbitration is the bulk of my investing (speculation?) here.

The End

Have a nice weekend, thanks for stopping by.