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Strategies & Market Trends : Value Investing
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To: Spekulatius who wrote (43159)7/5/2011 11:38:26 PM
From: Shane M1 Recommendation   of 78679
 
The problem with the Magic formula screen is that it only looks at backward data by design. The underlying assumption is that companies that have shown a good cash yield in the past, have a strong business and the stock will come back (to get into the screen they have to get cheap first).

I'm a big Magic Formula fan. I like the type of stocks it turns up, and I utilize a variation of MF in one of my stock selection approaches (I put a third leg into the approach that looks at various growth rates, but still very much MF at it's core).

while some may view it as a problem, Greenblatt's backtests on the MF approach have generated considerable alpha over time - I think around 5pp or so vs. market. Also, I guess it depends on definition of cheap, but some of the trendier names will make the MF list if other metrics are strong enough - for example AAPL is currently a MF stock. For this reason I say AAPL looks cheap - but others will disagree.
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