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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (40576)	12/14/2010 7:49:13 AM
From: Mark Marcellus	1 Recommendation Read Replies (3) of 78763

I assume that under Greenblatt's rules, if a stock works out (rises enough, maybe enough so as not to qualify any longer as a MagicFormula pick), then you go ahead and sell it. Whether it happens one day or 364 days into the holding. This is an incorrect assumption. If you follow his method you hold the stocks for one year (exactly long enough to qualify for long term capital gains tax treatment). This is regardless of valuation. One important principle behind the magic formula method is that you don't make decisions. You treat them as a basket, knowing that some will work out well, some will work out poorly, but on average over time they will work out better than the market. Of course, there's nothing to prevent anyone from taking the MF list as a starting point and doing anything they want. For those who know what they're doing that may even be a good idea. But if you're not buying the basket and holding them all for a year regardless of subsequent developments, you're not following Greenblatt's method.

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