Magic Formula Portfolio Policy
Originally, I set the Garcia Magic Fund to purchase 3 stocks every 3 months with the stocks representing 2%. It was a mistake. A friend who read the page pointed out the fund will have 50 stocks. That amount of stocks is well above the 20-30 Joel Greenblatt recommends for establishing a magic formula portfolio. I increased the current positions to 4% and will purchase 2 stocks every 3 months. This will give me 25 stocks and will allow me to reach the desired amount quicker.
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The same friend also asked why not hold the stocks for 1 year and 1 day for winning stocks and sell losers one day before a full year? This of course is the way Joel Greenblatt explained it in the book. Joel Greenblatt advocated this for taxable and tax free accounts. I am running a virtual portfolio. Also, in the
Magic Formula Investing FAQ Joel Greenblatt had the following to say, which is what I am aiming for ( 3-5 years).
Q: Why do you suggest owning each stock for only one year - I thought this was a long term strategy?
A: We chose a one year period so that we would not be suggesting a short term “trading” strategy and because it helps us to maximize our tax strategy. Since the magic formula uses last year’s earnings, after one year we like to use fresh data for our calculations. The magic formula “strategy”, however, only works over the long term (i.e. 3-5yrs).
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February 4th, 2008 at 3:22 pm
The meaning of Joel Greenblatt’s statement about 3-5 years means you need to follow the plan for 3-5 years. Not you need to hold stocks for 3-5 years. HIs magic formula was tested using the prarameters outlined in his book. Buy 20-30 postions over the couse of a year then hold each postion for 1 year. Holding stocks for 3-5 years using Greenblatt’s criteria may or may not produce the results you want.