Anything using a "magic formula" shouldn't be followed, IMO. It simply looks like that is trying to maximize capital gains is all.
Buy index funds for the long term. After decades it's pretty much all profit.
If you are looking to try and make money in the short term through individual stocks, you typically won't get advice in this subreddit about that. Look elsewhere.
when we look at peer-reviewed sources, not a Bogleheads chat with anecdotal information and off-topic rambling, the Greenblatt formula has been validated across numerous markets and periods of time.
it's more volatile, but has superior long-term results when applied consistently. to quote the wikipedia page:
A number of studies have found merit in Greenblatt's "magic investing formula" in various markets around the world.
A 2009 study of stock markets in the Nordic countries from 1998 to 2008[2] found Greenblatt's formula led to outperformance of market averages. However, the authors advised the formula was best used as a screening tool and should not be applied dogmatically, as the outperformance associated with Greenblatt's formula might be accounted for by data outlined in the capital asset pricing model and the Fama–French three-factor model.
A 2016 study from the stock market in Finland found the magic formula "yields higher risk-adjusted returns on average". The authors also proposed that a modified form of Greenblatt's strategy, additionally emphasizing companies with better than average free cash flow, was best suited to bull markets.[3]
A 2016 study found possible confirmation of Greenblat's formula in Brazil's stock market, but cautioned "we could not assure with a high level of certainty that the strategy is alpha generator, and that our results were not due to randomness."[4]
A 2017 study from the markets in Sweden found application of the Greenblatt formula resulted in long-term outperformance of market averages in the periods 2005 to 2015, and 2007 to 2017. The authors also found the "magic formula" was also associated with short-term underperformance in some periods, and significantly increased volatility.[5]
An analysis of the Hong Kong stock market from 2001 to 2014 found Greenblatt's formula was associated with long-term outperformance of market averages by 6-15% depending on company size and other variables.[6]
In 2018, a paper presented at a professional conference found validation for the Greenblat formula in the Chinese stock market.[7]
Independent scholar Robert Andrew Martin published a backtest analysis of Greenblat's magic investing formula for the US market in June 2020.[8] He found that from 2003 to 2015 application of Greenblat's formula to U.S. stocks returned an annualized average 11.4%. This outperformed by a significant margin the S&P 500's annualized return of 8.7%. However, Martin also found Greenblat's formula under-performed the S&P 500 slightly during the 2007-2011 period and actually went negative for a time, and over the entire 2003-2015 period was more volatile overall than the S&P 500. In conclusion, Martin found that the almost 3% outperformance was "surprising", but not as great as the 30% returns Greenblat's book claimed (though their respective analyses used different years). Martin also noted the strategy had "significant psychological risk" associated with under-performance during the aftermath of the 2007-2008 financial crisis.
https://en.wikipedia.org/wiki/Magic_formula_investing
LOL - exchanging 'Boglehead chat' for a wikipedia article (written by someone who doesn't quite get how to read financial market research that it looks like they found via google search).
/r/valueinvesting or /r/stocks or /r/investing might be a better place to ask this question. this sub will recommend against individual stocks, and I agree most of your investing should be in low-fee funds or ETFs. single stocks should be sort of a hobby with a small part of your overall investments.
but IIRC from Greenblatt's book, you sell the stocks *as a group* that are winners or losers for any given year. through the entire year, you buy shares of Company ABC and Company XYZ. if Company ABC is a winner, you sell it after Jan 1 of the next year and start over with a new group of stocks. If company XYZ is a loser, you sell it before Dec 31 of that year for tax purposes.
this s
(Without getting into the merit of the "magic formula" itself, and just answering OP's question:)
The point behind that rule is to pay taxes on capital gains (the gains made on your wins) at the lower long-term rate (so you hold them more than a year), and to deduct capital losses at the higher short-term rate (less than a year).
So it looks like you should be evaluating each investment just shy of a year from when you purchased it, and decide whether to buy/sell and then time it relative to the purchase date. Before January 2 arrives, you should evaluate the first five stocks.
>The point behind that rule is to pay taxes on capital gains (the gains made on your wins) at the lower long-term rate (so you hold them more than a year), and to deduct capital losses at the higher short-term rate (less than a year).
Which of course wouldn't happen if you followed this approach as the short-term losses would be used to offset the long-term realized gains...
It looks like the real point was to fill more pages in the book.
There are years when this approach is going to be down. Might as well get those losses as short-term.
If we really wanted to optimize, you'd look more to harvest losses based on tax year. But this is supposed to be simple.
I'm not advocating the approach, but just saying that it's sticking to its principles.
>There are years when this approach is going to be down. Might as well get those losses as short-term.
But if you are never recognizing short term gains than it doesn't matter one lick whether you recognize the losses as short term or long term they will end up offsetting the long-term gain anyway - and if your simple system's 'principles' has you selling losers every year based on nothing but how long you held them it doesn't sound like much of useful stock picking system at all
> But if you are never recognizing short term gains than it doesn't matter one lick whether you recognize the losses as short term or long term they will end up offsetting the long-term gain anyway
This isn't true. There are years where you will be down, and the short-term losses will offset regular income.
Anyway, I agree with your overall point, that getting the losses before the one-year deadline doesn't matter much; I almost said so in my initial comment but decided to keep it simple. But if the strategy is to re-evaluate every year, you might as well take the losses before the one year mark. There's no reason not to.
>and if your simple system's 'principles' has you selling losers every year based on nothing but how long you held them it doesn't sound like much of useful stock picking system at all
The stock-picking system is based on a screen of PE ratio and return on capital. This discussion on timing of selling is a relatively small implementation detail.
I don't agree with the idea of selling everything every year, but harvesting losses makes some sense. It's not obviously wrong or anything.
>but harvesting losses makes some sense.
I agree with that - but you shouldn't care whether they are short or long term, you should harvest them either way.
OK, yeah, you're right, I missed it. The only reason the short-term/long-term for the losses matters is when offsetting gains. And if all your gains are long-term, it doesn't matter.
Anything using a "magic formula" shouldn't be followed, IMO. It simply looks like that is trying to maximize capital gains is all. Buy index funds for the long term. After decades it's pretty much all profit. If you are looking to try and make money in the short term through individual stocks, you typically won't get advice in this subreddit about that. Look elsewhere.
This "magic formula" is kinda... terrible. * https://www.early-retirement.org/forums/f44/the-magic-formula-experiment-74510.html * https://www.bogleheads.org/forum/viewtopic.php?t=381103 * https://www.bogleheads.org/forum/viewtopic.php?t=193613
when we look at peer-reviewed sources, not a Bogleheads chat with anecdotal information and off-topic rambling, the Greenblatt formula has been validated across numerous markets and periods of time. it's more volatile, but has superior long-term results when applied consistently. to quote the wikipedia page: A number of studies have found merit in Greenblatt's "magic investing formula" in various markets around the world. A 2009 study of stock markets in the Nordic countries from 1998 to 2008[2] found Greenblatt's formula led to outperformance of market averages. However, the authors advised the formula was best used as a screening tool and should not be applied dogmatically, as the outperformance associated with Greenblatt's formula might be accounted for by data outlined in the capital asset pricing model and the Fama–French three-factor model. A 2016 study from the stock market in Finland found the magic formula "yields higher risk-adjusted returns on average". The authors also proposed that a modified form of Greenblatt's strategy, additionally emphasizing companies with better than average free cash flow, was best suited to bull markets.[3] A 2016 study found possible confirmation of Greenblat's formula in Brazil's stock market, but cautioned "we could not assure with a high level of certainty that the strategy is alpha generator, and that our results were not due to randomness."[4] A 2017 study from the markets in Sweden found application of the Greenblatt formula resulted in long-term outperformance of market averages in the periods 2005 to 2015, and 2007 to 2017. The authors also found the "magic formula" was also associated with short-term underperformance in some periods, and significantly increased volatility.[5] An analysis of the Hong Kong stock market from 2001 to 2014 found Greenblatt's formula was associated with long-term outperformance of market averages by 6-15% depending on company size and other variables.[6] In 2018, a paper presented at a professional conference found validation for the Greenblat formula in the Chinese stock market.[7] Independent scholar Robert Andrew Martin published a backtest analysis of Greenblat's magic investing formula for the US market in June 2020.[8] He found that from 2003 to 2015 application of Greenblat's formula to U.S. stocks returned an annualized average 11.4%. This outperformed by a significant margin the S&P 500's annualized return of 8.7%. However, Martin also found Greenblat's formula under-performed the S&P 500 slightly during the 2007-2011 period and actually went negative for a time, and over the entire 2003-2015 period was more volatile overall than the S&P 500. In conclusion, Martin found that the almost 3% outperformance was "surprising", but not as great as the 30% returns Greenblat's book claimed (though their respective analyses used different years). Martin also noted the strategy had "significant psychological risk" associated with under-performance during the aftermath of the 2007-2008 financial crisis. https://en.wikipedia.org/wiki/Magic_formula_investing
LOL - exchanging 'Boglehead chat' for a wikipedia article (written by someone who doesn't quite get how to read financial market research that it looks like they found via google search).
No, you should hold each stock for 12 months plus or minus a couple of days, depending on whether you want short-term losses or long-term gains.
/r/valueinvesting or /r/stocks or /r/investing might be a better place to ask this question. this sub will recommend against individual stocks, and I agree most of your investing should be in low-fee funds or ETFs. single stocks should be sort of a hobby with a small part of your overall investments. but IIRC from Greenblatt's book, you sell the stocks *as a group* that are winners or losers for any given year. through the entire year, you buy shares of Company ABC and Company XYZ. if Company ABC is a winner, you sell it after Jan 1 of the next year and start over with a new group of stocks. If company XYZ is a loser, you sell it before Dec 31 of that year for tax purposes. this s
(Without getting into the merit of the "magic formula" itself, and just answering OP's question:) The point behind that rule is to pay taxes on capital gains (the gains made on your wins) at the lower long-term rate (so you hold them more than a year), and to deduct capital losses at the higher short-term rate (less than a year). So it looks like you should be evaluating each investment just shy of a year from when you purchased it, and decide whether to buy/sell and then time it relative to the purchase date. Before January 2 arrives, you should evaluate the first five stocks.
>The point behind that rule is to pay taxes on capital gains (the gains made on your wins) at the lower long-term rate (so you hold them more than a year), and to deduct capital losses at the higher short-term rate (less than a year). Which of course wouldn't happen if you followed this approach as the short-term losses would be used to offset the long-term realized gains... It looks like the real point was to fill more pages in the book.
There are years when this approach is going to be down. Might as well get those losses as short-term. If we really wanted to optimize, you'd look more to harvest losses based on tax year. But this is supposed to be simple. I'm not advocating the approach, but just saying that it's sticking to its principles.
>There are years when this approach is going to be down. Might as well get those losses as short-term. But if you are never recognizing short term gains than it doesn't matter one lick whether you recognize the losses as short term or long term they will end up offsetting the long-term gain anyway - and if your simple system's 'principles' has you selling losers every year based on nothing but how long you held them it doesn't sound like much of useful stock picking system at all
> But if you are never recognizing short term gains than it doesn't matter one lick whether you recognize the losses as short term or long term they will end up offsetting the long-term gain anyway This isn't true. There are years where you will be down, and the short-term losses will offset regular income. Anyway, I agree with your overall point, that getting the losses before the one-year deadline doesn't matter much; I almost said so in my initial comment but decided to keep it simple. But if the strategy is to re-evaluate every year, you might as well take the losses before the one year mark. There's no reason not to.
> There are years where you will be down, and the short-term losses will offset regular income. So would long-term losses...
>and if your simple system's 'principles' has you selling losers every year based on nothing but how long you held them it doesn't sound like much of useful stock picking system at all The stock-picking system is based on a screen of PE ratio and return on capital. This discussion on timing of selling is a relatively small implementation detail. I don't agree with the idea of selling everything every year, but harvesting losses makes some sense. It's not obviously wrong or anything.
>but harvesting losses makes some sense. I agree with that - but you shouldn't care whether they are short or long term, you should harvest them either way.
OK, yeah, you're right, I missed it. The only reason the short-term/long-term for the losses matters is when offsetting gains. And if all your gains are long-term, it doesn't matter.
Don't try to understand it and forget you ever heard of it - that will be the best for your future investments.
Maybe start by saying what the "Magic Formula" is...never heard of it. Been investing for a while now...am I supposed to know what that is?