MagicDiligence
Magic Recipe 0.41%
Deep Value 0.66%
Star List 0.44%
S&P 0.08%
Today's Performance (see long-term performance)

Reviewing The First Quarter Of Performance For Our Spells

It has been just over 3 months now since we launched our stock "Spells", pre-designed stock ranking screens designed in the fashion of Joel Greenblatt's Magic Formula Investing.

3 months - a fiscal quarter - isn't really enough to make any judgments on the long-term viability of any investing strategy, obviously. Nevertheless, it is important that we keep track of the Spells against the overall market. While we have solid evidence from Greenblatt and other researchers (like James O'Shaughnessy) that these quantitative strategies work, there is nothing like a real-life implementation to put them to the test.

So, with that, let's take a look at how we are doing so far. But first, a quick explanation of how the performance numbers are calculated.

How We Calculate Performance

The Spells are not real-money portfolios, rather just a collection of stocks ranked and meeting certain criteria each day.

Therefore an equal weighting, daily re-balancing strategy is how we calculate performance.

Put simply, the daily performance of each Spell is simply the average daily performance of each component stock. These are the numbers you see across the top of the page here, compared to the daily performance of the S&P 500. We save these values every day.

To calculate longer-term performance, we take starting capital of $10,000 and run it through the daily performances sequentially for each day of the time period we are calculating for. For example, we start with $10,000 on day 1 and apply each day's performance to it in turn. So, if day one had a 1% gain and day 2 had a 1% drop, the value on the start of day 3 would be $9,999 (because 1% of $10,100 is $101).

We do the same for the S&P 500 to get our comparison point.

First 3 Months Of Performance

For the period of 2/19 through 5/20, the S&P 500 would have returned 7.41%, compounded daily. Here are all 4 Spells' relative performance over the first 3 months, from 2/19 through 5/20.

SpellPerformanceVs. S&P
Magic Recipe Spell +7.76% +0.35%
Deep Value Spell +6.59% -0.82%
Quality Growth Spell +13.88% +6.47%
Star List Spell +9.04% +1.63%

All but one - the Deep Value Spell - outperformed the market over their first 3 months of existence. The Magic Recipe Spell, which is based on Greenblatt's Magic Formula, was a light out-performer, but the Star List and particularly the Quality Growth Spells both outperformed substantially. It will be very interesting to see if they can maintain this kind of outperformance going forward.

We've traditionally been focused on value-based stocks at MagicDiligence, but I have a lot of hope for the Quality Growth Spell. The market's big long-term winners have always been companies that can grow revenues rapidly and expand using internal cash flows - exactly the two things that the screen ranks for. And, because the Quality Growth Spell isn't price-sensitive, it was designed to hold winners for the longer term, as opposed to the other 3, price-sensitive Spells that have substantially higher turnover.

On the flip side, the Quality Growth Spell is also the one screen that we don't have a lot of research support for outperformance. According to O'Shaughnessy's research, revenue growth alone is not a great predictor of future stock returns, and cash return on invested capital was a mediocre indicator at best.

Nevertheless, it was a solid initial showing for our Spells and we will continue to track their performance going forward. Check out their full results by signing up for our very low-cost membership today!

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