A Different Kind of Magic Formula (Solo Episode)

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Mar 5, 2025

Discover a fresh take on the magic formula for investing, blending insights from legends like Buffett and Graham. Unravel the flaws in using Return on Invested Capital during market peaks with a striking example of an egg company. Explore the innovative BSG stock list, focusing on undervalued companies at cyclical lows. The discussion also highlights the evolution of personalized investment strategies, influenced by the rise of ETFs, while seeking audience input on future podcast directions.

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INSIGHT

Magic Formula Flaw

The host is creating a stock list inspired by Joel Greenblatt's magic formula, combining quality and value.
This method hasn't worked well, likely due to the return on invested capital (ROIC) component.

ANECDOTE

CalMaine Example

CalMaine, an egg company, performed well in the magic formula during a cyclical peak but declined afterward.
This highlights how ROIC can be misleading when screening for quality.

INSIGHT

Mean Reversion vs. ROIC

Screening for high ROIC often identifies companies at a cyclical peak, while screening for low valuations finds companies at a cyclical low.
This suggests that mean reversion is a better bet than relying on trailing ROIC.

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Today’s podcast is solo.

I discuss the stock list, which is my version of the magic formula.

Links

* Ben Graham’s Low P/E, Low Debt/Equity Method: https://alphaarchitect.com/wp-content/uploads/2011/04/Simple-and-Easy-Approach-Medical-Economics-Graham-1976.pdf

* The Little Book that Beats the Market: https://www.amazon.com/Little-Still-Market-Books-Profits-ebook/dp/B003VWCQB0/

* The 2025 VSG Stock List:

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