I started running a real-time experiment on Singapore’s stock market in January 2015 and documented the beginning in an article published in the same month titled The Best Shares in Singapore’s Stock Market.
The experiment was to find out if the Magic Formula investing strategy works. The strategy was developed by investor Joel Greenblatt, who generated an astounding annual return of 50% from 1985 to 1994 according to The New York Times.
In his 2005 book The Little Book That Beats The Market, Greenblatt shared the Magic Formula and his studies on it. You can find a detailed description of the investing strategy in The Best Shares in Singapore’s Stock Market, so I won’t repeat myself here. But one thing worth noting is that Greenblatt’s investing method requires a yearly refresh to find a new list of shares to build a portfolio.
So, I’ve written a series of articles in the Januaries of 2015, 2016, 2017 and 2018 touching on each year’s new list of shares, as well as the lessons I’ve learnt from each run of the real-time Magic Formula experiment. Here are the articles:
1. On the returns and lessons from the 2015 Magic Formula portfolio
2. On the Magic Formula portfolio for 2016
3. On the returns and lessons from the 2016 Magic Formula portfolio
4. On the Magic Formula portfolio for 2017
5. On the returns and lessons from the 2017 Magic Formula portfolio
6. On the Magic Formula portfolio for 2018
It has been a year since I published the list of 30 Magic Formula shares for 2018. These 30 shares have delivered an average loss of 6.7%, including dividends. That’s not a performance worth celebrating, but the Straits Times Index (SGX: ^STI), Singapore’s stock market benchmark, had suffered a loss of 9.1% with dividends included over the same timeframe. The table below shows the results of my real-time experiment with the Magic Formula:
Source: S&P Global Market Intelligence
As a reminder, here are the five shares in the 2018 portfolio with the highest scores according to the Magic Formula:
The table below shows how all 30 shares in the 2018 Magic Formula portfolio had done over the past year:
Source: S&P Global Market Intelligence
It’s clear that the 2018 Magic Formula portfolio had some huge winners as well as painful duds. This is a recurrent theme: The same dynamic happened for the 2015, 2016, and 2017 Magic Formula portfolios too.
Although we now have four years’ worth of real-time data from the Magic Formula in Singapore’s stock market, that is still too short a timeframe for conclusive findings. But, there are still important lessons we can pick up. What I learnt from 2018’s Magic Formula portfolio largely mirrors the lessons I gleaned from the results of the 2015, 2016, and 2017 editions, so I’ll just provide a quick summary:
1. Not even the best investing strategies can work all the time.
2. Investing can be an emotionally draining affair – so be prepared for that.
3. Cheap stocks can hurt, at least over the short-term.
4. Great winners can come from shares that have already done well.
5. It’s important to have a diversified portfolio, since there are both big winners and losers in each year’s Magic Formula portfolio; if we own only a handful of shares, one single share with a large decline can scar our portfolios’ returns.
As I mentioned earlier, the Magic Formula requires a yearly refresh. So, I have come up with a new list of 30 Magic Formula shares for 2019. Check out the new list of 30 shares 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 OKP Holdings, China Sunsine Chemical Holdings, Valuetronics, Yangzijiang Shipbuilding Holdings, Straco Corporation, and Boustead Singapore. The Motley Fool Singapore has a recommendation on AEM Holdings, Straco Corporation, and Boustead Singapore.