Current / Original Magical Formula Hybrid Strategy

My temperament is that I become very fidgety when investing due to lack of a huge emergency cash reserve. This is couple with the fact that my cash flow is irregular, which just boosts my stress levels even higher and makes it easy to let emotions get involved with investment decisions. If that describes you, this strategy might be great for you.

As a result, I think a mechanical investing strategy that dictates holding period, buying criteria and selling criteria would suit me more. I would also prefer a mechanical investing strategy to lean towards diversification rather than concentration to reduce emotional involvement when researching deeply into stocks which thus requires diversification to protect against ignorance.

As a result I will deploy a Current / Original Magical Formula Hybrid Strategy, where I will start off with Joel Greenblatt’s Magical Formula (the outlined in his book “The Little Book That Beats The Market”) and then tap into Joel Greenblatt’s Original Magical Formula from time to time when NCAV stocks of that caliber are available.

The beauty of the Magical Formula to me is as follows:

  • The strategy under performs from time to time, thus allowing me to shake off competition by sticking to it
  • The principles just make sense so it definitely works
  • Holding period is short (1 year), thus allowing me to hold less cash in emergency cash reserves
  • Requires much less capital to start as opposed to the amount required in a traditional Benjamin Graham type NCAV stock strategy (20+ stocks)

My plan of action would be to:

  1. Ensure I have 12 months worth of expenses in cash.
  2. Buy as much Magical Formula stocks as possible when cash is available (at most 2% commission [1])
  3. Once I can afford to buy 4 Magical Formula stocks / month [2]
    1. Maintain buying 2 Magical Formula stocks / month [3]
    2. Buy Original Magical Formula stocks if available
    3. If Original Magical Formula stocks unavailable, buy more Magical Formula stocks instead


[1] The reason why at most 2% commission is because the backtests of Magic Formula shows that it beats the market by 4+% under realistic conditions. I want to make sure I at least make 10+% returns after commissions as I want to still be able to generate better than market returns’ historical average of ~6-9% returns.

[2] The reason why I only buy Original Magical Formula stocks when I can afford to buy 4 Magical Formula stocks / month is because Benjamin Graham advocates buying 20+ stocks for NCAV stocks (Original Magical Formula stocks are NCAV stocks with special characteristics) while Joel Greenblatt advocates buying 20+ stocks for Magical Formula stocks (non-NCAV stocks), so I try to maintain the diversification required for both strategies to work.

[3] The reason why I will maintain buying 2 Magic Formula stock / month even after I start buying Original Magical Formula stocks is because the strategy only works if I persevere even when it under performs the market, thus requiring full commitment through cycles of over-performance and under-performance in order to reap the benefits of the Magic Formula strategy instead of foregoing maximum profits prematurely.


Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)


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