October Portfolio Results

Here's what my portfolio looks like at the end of October (stocks were purchased on the morning of 10/26, during a substantial dip):



At this time, there's a 3.67% return.


A few relevant indices for comparison:

Index        Symbol     10/26       10/31      % Change
DJIA         ^DJI      12,100      12,080      -0.17%
S&P 500      ^GSPC      1,380       1,378      -0.15%
Nadaq        ^IXIC      2,350       2,365       0.64%
Wilshire 5k  ^DWC      13,834      13,829      -0.04%

So, so far, so good, but it hasn't been a week yet. The Magic Formula method calls for holding these stocks for about a year (sell early if you have a loss, and hold the winners over one year for the long-term capital gains tax rate, instead of the marginal tax rate).

I'm feeling confident now, but value investing often puts the investor at odds with the herd (you're often buying a stock everybody else hates), and it often gets pretty lonely out there.

The Other "Little Book"

Morningstar.com has an article about that other "little book", Christopher Browne's 'Little Book of Value Investing'.

Chrisopher Browne is a managing director of Tweedy Browne Company, LLC, a company associated with Ben Graham and Warren Buffett.

He recommends avoiding companies saddled with debt, and buying companies with a high earnings yield (should sound familiar to anyone following the Magic Formula), low price/book, with insider purchases. And like Greenblatt, he knows that few people will be able to follow his advice, because they lack the temperament (Greenblatt says patience). The article links to an excerpt from the book, and another useful article on moats and investor temperament.




Tomorrow evening, I'll post my results so far. I plan on posting a portfolio update every month.

Where Is The Yield?

Where Is The Yield? is another blog here at blogspot about investing. This article is entitled, Highest-Yielding Magic Formula Stocks. The author has tweaked the magic formula to go for dividend-paying companies that also fit the magic formula (high return on assets, at a bargain price). I prefer dividend-payers, myself, because it means they are profitable. His method makes sense to me.

First Transactions at Zecco.com

Thursday, 10/26, I made my first 5 trades as part of the Magic Formula. Here are the steps I took:

1. Went to MagicFormulaInvesting.com and requested a list of 25 companies with market capitalizations above 50 million.
   
2. Picked 9 companies, looking for either recent filings or good return numbers, or a name I recognized. The formula calls for choosing 5-7 of these companies at random, and I strayed a little bit from this. The time I spent researching these companies was a couple minutes each. I read their company profiles, saw if they pay a dividend, and that's about it.
   
3. Did a sanity check on these to see if they were profitable, and ran a generic DCF analysis to see if they were undervalued, based on analyst projections (one of the points of the magic formula is that nobody knows how much a company will grow in the future, but you can see how much money they made in the past; this is obvious when you compare high and low analyst projections for most companies. Trained professionals vary widely in their guesstimates, so why should I, an average guy with no training, spend hours and hours trying to come up with my own numbers?). This bumped off just 1 company, and 1 company squeaked by, so I dropped it.
   
4. Left with just 7 companies, I dropped 2 more. I had looked into buying one earlier this year and had rejected it (it was a biotech with 1 product about to face generic competition, Viropharma), so I marked it off the list, and dropped the other because I didn't like its product. Maybe I'll buy these 4 dropped companies in a couple of months.
   
5. Bought equal dollar amounts (or about as close as I could get) of the following 5 companies at Zecco.com:
   

1. 9 shares of FCX @$59.31 = $533.79
   
2. 20 shares of FDG @$24.72 = $494.40
   
3. 33 shares of PALM @$15.41 = $508.53
   
4. 46 shares of PLAY @$10.94 = $503.24
   
5. 29 shares of OVTI @$15.78 = $457.62
   For a grand total of: $2497.58
   

The plan is to do this every 2 or 3 months, and post the results.

What is Zecco? and Why Zecco?

It's not some kind of candy, it's a website offering commission-free trades, relying on interest on deposits and ad revenue to cover the $2/trade cost, and relying on news stories and word of mouth to gain customers. There are some limitations, however, like only 10 trades in one day, or 40 in a month ($3.50 for each trade above that).

Why choose Zecco for magic formula investing? First, let's review the magic formula itself. It requires you to buy 5-7 stocks every 2 or 3 months, and sell them about a year after purchase (sell losses before the year is up, and gains after a year, for tax purposes). This gives you 60 buys and sells in one cycle. When you sell, you're also going to be buying the same number of stocks to replace the ones you sold, so once you get started, you have months with 10-14 transactions occurring every 2-3 months.

Running the numbers with Sharebuilder, you can buy 6 stocks in a month for $12, with the standard subscription, which isn't too bad. But to sell those 6 stocks a year later will cost you $14.95/each, or $89.70. If you time your purchases to 5 months with 6 buys per month, you'll incur $12 X 5 = $60 for the purchases, and 30 X $14.95 = $448.50 for the sales, for a grand total of $508.50. I don't know about you, but that isn't an inconsequential amount of money for me. Foliofn and other similar sites will cost similar amounts, due to the monthly fees.

What about Tradeking, with $4.95 trades? That will still run you almost $300 for 60 trades, or $50-$70 every 2-3 months. It's hard to beat free.

What is Magic Formula Investing?

Magic Formula Investing is a value investing method that is pretty simple, and outperforms most anything else. It looks at companies that generate a good return on investment, and buys them when they're on sale. If you go to MagicFormulaInvesting.com, you can even get the list of companies to buy stock in, for free! Sounds pretty simple, right? We'll see...

The Magic Formula is explained in Joel Greenblatt's Little Book:

Account set up and funding with Zecco

To set up my Zecco.com account, I needed the usual account setup type things, like bank account information, social security number, etc. I also had to send the signed paperwork with a photocopy of my driver's license, but could expedite the process by scanning and emailing this. To verify my ING Direct account, they made 2 small deposits. One warning: once I confirmed the account, they withdrew these deposits. So you may want to be careful with accounts that only allow 6 withdrawals per month. It will take 3 withdrawals to confirm and fund your account.

Timeline:
10/09 - Set up online account with Zecco.com (for accessing the site, message boards, etc.)
10/13 - Applied for an account online
10/17 - Emailed paperwork
10/18 - Received a reply, reminding me to mail the physical documents
10/20 - Account application approved. signed in and created 'trading key', began process to have ACH link with ING confirmed.
10/21 - Mailed physical documents
10/24 - Received 2 small deposits and confirmed bank account, initiated withdrawal of $2500 from Zecco's site
10/25 - Money withdrawn from ING
10/26 - Money available for trading