On 7 January 2015, I had published an article titled The Best Shares in Singapore’s Stock Market.
The article was about an investing strategy, called the Magic Formula, that super investor Joel Greenblatt had shared in his 2005 book, The Little Book That Beats the Market. In my aforementioned article, I had applied the Magic Formula to Singapore’s stock market as a form of experimentation and constructed a hypothetical portfolio of 30 stocks based on it.
You can see how the hypothetical portfolio has performed and the lessons we can learn from it right here. As for the details behind the Magic Formula, this is how I had previously described it:
“The formula works by first ranking all shares (excluding financials and utilities because of their unique financial structure) on their returns on invested capital. Each share is given a score based on their rank. Then, all shares (again excluding financials and utilities) are ranked on their earnings yield and given a score based on that. Both scores are then added up.
A portfolio of the lowest-scored shares would be held for a year before the ranking exercise is done again and a new portfolio is constructed based on the shares with the lowest scores at the time the latest ranking exercise is done. This would go on every year. Rinse and repeat.
Greenblatt’s idea behind the Magic Formula is deceptively simple but it works on solid investment footing – he wants to buy the best quality shares (the ones with the highest return on invested capital) at the lowest possible price (the ones with the highest earnings yield). That’s a strong recipe for success.
By constructing a 30-stock portfolio of the shares with the lowest scores and back-testing the results from 1988 to 2004, Greenblatt showed that his Magic Formula approach generated annualised returns of 30.8% compared to the S&P 500’s 12.4% annual gain. The S&P 500 is a broad market index in the U.S. which is akin to the Straits Times Index (SGX: ^STI) here in Singapore.”
You can see that a new portfolio has to be constructed every year with the Magic Formula. As I want to see how Greenblatt’s approach can work in Singapore over the long-term, I’ve decided to carry on the experiment and had built a new portfolio of 30 Magic Formula stocks (I had excluded all financial and utility stocks as well as those with a market capitalisation of less than S$100 million; these had been done previously too).
The five best stocks in my new list of 30, according to the Magic Formula, are Rotary Engineering Limited (SGX: R07), Valuetronics Holdings Limited (SGX: BN2), Hock Lian Seng Holdings Limited (SGX:J2T), T T J Holdings Ltd (SGX: K1Q), and Wee Hur Holdings Ltd (SGX: E3B). You can see all 30 stocks in the table below:
I think it’s an interesting list and they might just be Singapore’s best stocks for 2016. I’d be revisiting this list of 30 stocks a year later to see how they’ve done – so stay tuned!
Meanwhile, if you'd like more investing analyses and important updates about the stock market, sign up for The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.
Like us on Facebook to follow our latest hot articles.
The Motley Fool's purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Kingsmen Creatives and Straco Corporation.