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Magic Formula Investing and the HSI

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  1. #1

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    Magic Formula Investing and the HSI

    I stumbled across something called "Magic Formula Investing" today:

    https://en.wikipedia.org/wiki/Magic_formula_investing

    Interestingly, a HK academic, in a paper yet to be published, did some back-testing with it against the Hang Seng Index over the period 2001 to 2014:

    http://www.sef.hku.hk/~chunxia/magic_investing.pdf

    One conclusion was that:

    "As we separate the stocks in half accordingto their market capitalization, we find the top 30% of the large stocks with high magicformula measure would earn an annualized return of 20.26% while the bottom 30% with lowmagic formula measure would earn only 5.65% annually. Similarly for the small stocks, theportfolio of stocks with high magic formula measure has 6.04% more return annually thanthe portfolio with low magic formula measure"

    One thing the study did not do, as far as I could see, was compare the formula's performance with that of the actual index. How does one work out the annualized return of the HSI for the period 2001 to 2014? From a Yahoo site, I found that the HSI was at 16102.35 on Jan 1st 2001, and 23605.04 on Dec 31st 2014. Is annualized return the same as the Compound Annual Growth Rate which one website, given the start and end values of the HSI values for the given date range, calculates it to be only 2.77% ???

    Vrindavan likes this.

  2. #2

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    Quote Originally Posted by dontdrink&drive:
    compounding is another get rich formula
    https://xkcd.com/947/

  3. #3

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    Quote Originally Posted by dontdrink&drive:
    compounding is another get rich formula
    WTF?

    10 char.

  4. #4

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    Original Post Deleted
    Ah. This book has been on my "to read" list for a while. Along with...

    - Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman — Reviews, Discussion, Bookclubs, Lists
    - You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits by Joel Greenblatt — Reviews, Discussion, Bookclubs, Lists
    - Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris — Reviews, Discussion, Bookclubs, Lists

    I think a lot of the books on trading are pretty dated (and the others that seem more current). Anything more recent to share?

    By the way, the latest Trading Systems & Methods is a tad cheaper on book depository because of the free shipping. Thank you for convincing me to part with $655.

  5. #5

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    Possibly a US issue. In his book, Greenblatt says financial and utilities companies' financial reporting was done in a 'different' way.

    It's funny but the other day I did some stock ranking as per the formula's instructions. I used the P/E and ROA figures from the aastocks.com site. The stock that came top was Greatwall Motors (2333). And guess what? It's just shot up more than 25% in stock price today. What a spooky coincidence! Unfortunately, I hadn't bought any shares in the company.

    (The stock that came 2nd in the ranking was YOFC (6869) - I'll keep an eye on its performance. Greatwall is most likely a fluke. It's the kind of thing that lures people into believing and then losing lots of money)
    Last edited by tomcat98; 30-09-2015 at 02:12 PM.

  6. #6

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    Quote Originally Posted by tomcat98:
    Possibly a US issue. In his book, Greenblatt says financial and utilities companies' financial reporting was done in a 'different' way.

    It's funny but the other day I did some stock ranking as per the formula's instructions. I used the P/E and ROA figures from the aastocks.com site. The stock that came top was Greatwall Motors (2333). And guess what? It's just shot up more than 25% in stock price today. What a spooky coincidence! Unfortunately, I hadn't bought any shares in the company.

    (The stock that came 2nd in the ranking was YOFC (6869) - I'll keep an eye on its performance. Greatwall is most likely a fluke. It's the kind of thing that lures people into believing and then losing lots of money)
    2333 went up because they split: each share became 3. Before the split, the share was trading in the range of $21-24/

  7. #7

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    Original Post Deleted
    Couldn't find an explanation about utilities companies apart from a throwaway line to do with them being regulated heavily by governments which I cannot attribute to Greenblatt for certain.

    In one interview he had this to say about financial companies:

    "Financial stocks don't work with EBIT (earnings before interest and taxes), since looking at a bank, for example, "before interest" is a bit meaningless. But we have developed other methods that make sense for both financials and utilities that make adjustments for the differences in these types of companies and seem to work well. So far, we haven't shared them widely, but they are both logical and in line with the way we look at other industries."

    That may mean more to you than to me.

  8. #8

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    Utilities are not without risk. When they go bad, it can be a real mess. There was an interesting interview with CLPs CEO in the Australian press this morning. Before jumping in, make sure you understand the risks, merchant power generation is a very different animal to a regulated distribution business.