7 January 2015 marked the start of an experiment I wanted to run on Singapore-listed stocks. I documented it in the article titled The Best Shares in Singapore’s Stock Market. The aim of the experiment was to find out how the Magic Formula investing strategy works here over the long run.
The Magic Formula was developed by Joe Greenblatt, and it was described in his 2005 investing book, The Little Book That Beats The Market. According to The New York Times, Greenblatt has an incredible track record as an investor – from 1985 to 1994, he delivered annual returns, before fees, of 50%.
In The Best Shares in Singapore’s Stock Market, I had described how the Magic Formula works, so I will not repeat myself. But what’s important to note is that the Magic Formula requires a yearly refresh.
So, on January 2016, I published two articles: (a) An article that touched on the 2015 Magic Formula portfolio’s returns and lessons; and (b) an article on a new portfolio of Magic Formula stocks for 2016. On January 2017, I did the same thing. I wrote and published two articles: (a) An article discussing the 2016 Magic Formula portfolio’s returns and lessons; and (b) an article on a fresh portfolio of Magic Formula stocks for 2017. Here are all the articles:
A year has passed since I had picked the 30 Magic Formula stocks for 2017. And it was a good year for the portfolio. The Straits Times Index (SGX: ^STI) had gained 22.1% in this timeframe including dividends, but the portfolio increased by 25.5%, again including dividends.
As a reminder, the five stocks in 2017 with the highest ratings, according to the Magic Formula, were:
1. Sinostar PEC Holdings Limited (SGX: C9Q)
2. T T J Holdings Ltd (SGX: K1Q)
3. Yuuzoo Corporation Ltd (SGX: AFC)
4. Sing Holdings Limited (SGX: 5IC)
5. Valuetronics Holdings Limited (SGX: BN2)
The table below shows how all 30 stocks in the 2017 Magic Formula portfolio had done over the past year:
Source: S&P Global Market Intelligence
As you can see, the 2017 Magic Formula stocks had some big winners as well as painful losers. This is now a recurrent theme: In the 2015 as well as 2016 Magic Formula portfolios, the same dynamic was present too.
There are now three years’ worth of real-time returns from the Magic Formula in Singapore’s stock market. But it is still too short a timeframe for conclusive findings. Yet, there are still lessons we can pick up.
My takeaways from the 2017 Magic Formula portfolio’s performance largely mirror those of 2016’s (the link is here again), so I will not be rehashing them. But I have one previous lesson I want to highlight, and one new lesson to share:
1. The previous lesson I want to highlight is this: Great winners can come from stocks that are already winning. Valuetronics was in the 2015, 2016, and 2017 Magic Formula portfolios. The company’s dividend-adjusted gains in those three runs were 27.2%, 37.9%, and 113.7%, respectively. That’s outstanding.
2. The new lesson I want to share is this: The presence of big winners as well as big losers in the 2015, 2016, and 2017 Magic Formula portfolios highlights the importance of having a diversified portfolio. If you own only a handful of stocks, one big loser can mar your portfolio’s returns horribly.
As I mentioned earlier, the Magic Formula requires a yearly refresh. So, I have produced a new list of 30 Magic Formula stocks for 2018 (Valuetronics is in this new list too). Check out the new list of 30 stocks 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 YuuZoo Corporation, Valuetronics Holdings, China Sunsine Chemical Holdings, Boustead Singapore, Boustead Projects, and Straco Corporation. The Motley Fool Singapore has a recommendation on Micro-Mechanics (Holdings), Nordic Group, and Straco Corporation.