Two years ago on 7 January 2015, I started an experiment in Singapore’s stock market and documented it in the article titled The Best Shares in Singapore’s Stock Market. I wanted to find out how the Magic Formula investing strategy works here over the long-term.
The strategy is described in investor Joel Greenblatt’s 2005 book, The Little Book That Beats the Market. Greenblatt has a fantastic track record, clocking returns of 50% annually before fees from 1985 to 1994, according to a profile in The New York Times.
I had previously described the Magic Formula in my aforementioned article, so I will not rehash it here. But what’s important to know is that the Magic Formula picks a bunch of stocks using – what else? – a formula. The stocks that score best based on the formula are used to build a portfolio that’s supposed to be held for a year. After which, the investor has to run the formula again to pick a new group of stocks. In other words, the Magic Formula requires a yearly refresh.
On 7 January 2016 – one year after The Best Shares in Singapore’s Stock Market – I published an article that touched on the 2015 Magic Formula portfolio’s returns and the lessons I learnt. You can find it here. I also published another article on the same day that documented my on-going Magic Formula experiment. In that article, titled The 30 Best Stocks In Singapore For 2016, I shared my 2016-refresh of the Magic Formula and a new list of 30 stocks.
In this article you’re reading now, I want to share how the 2016 Magic Formula portfolio had done and some lessons we can learn from it. The five best stocks (in descending order) from the 2016 portfolio were: 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).
The following table shows how the 2016 Magic Formula portfolio’s stocks have performed over the past year:
Source: S&P Global Market Intelligence
Just as it was for the 2015 Magic Formula portfolio, the 2016 version also produced some big winners as well as big losers. Some of the standout performers were mm2 Asia Ltd (SGX: 1B0) and Poh Tiong Choon Logistics Ltd (SGX: P01) – they both had returns of 100% or more. The key difference between both portfolios’ results is that the 2016 portfolio had made a gain of 16.6% whereas 2015’s had delivered a loss of 14.3%.
We now have two years’ worth of real-time results for the Magic Formula in Singapore’s stock market. It’s still too short a timeframe to come up with conclusive findings based on those, but I think there are still things we can learn from the experiment.
My takeaways from 2016’s results largely mirror those that I wrote in my article for 2015’s (link’s here again), so I will not repeat them here. But, I have one additional learning point:
- Some investors like to look for bargains amongst lists of stocks that have been beaten down. But, great winners can come from stocks that are already winning. A good case in point is Valuetronics Holdings Limited (SGX: BN2). The company was in both the 2015 and 2016 Magic Formula portfolios. From 5 January 2015 to 5 January 2016, Valuetronics delivered a dividend-adjusted return of 27.2%. Over the next year from 5 January 2016 to 5 January 2017, the company’s dividend-adjusted return was 37.9%. A winner has carried on winning.
The Magic Formula is supposed to work by constructing a new portfolio each year, as I already mentioned. So, I’ve come out with a new list of 30 stocks for 2017 (Valuetronics is in this new list too). You can check it out here!
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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 Straco Corporation and Kingsmen Creatives.