Wow. I recently finished examining the first two years of returns for our Formula Investing U.S. separately managed accounts. The results are stunning. But probably not for the reasons you’re thinking. Let me explain.
Formula Investing provides two choices for retail clients to invest in U.S. stocks, either through what we call a “self-managed” account or through a “professionally managed” account. A self-managed account allows clients to make a number of their own choices about which top ranked stocks to buy or sell and when to make these trades. Professionally managed accounts follow a systematic process that buys and sells top ranked stocks with trades scheduled at predetermined intervals. During the two year period under study, both account types chose from the same list of top ranked stocks based on the formulas described in The Little Book that Beats the Market. But before I get to the results, let me rewind a little and review how we got here in the first place.
In 2005, I finished writing the first edition of The Little Book that Beats the Market and I panicked. The book contained a simple formula to pick stocks that encapsulated the most important principles that I use when making my own stock selections. The problem was that after I finished, I realised that the individual investors I was trying to help might try to follow the book’s advice but use poor quality company information found over the internet or a miscalculation of the formula to make unsuccessful stock investments (or possibly worse, they might use the book to learn how to write run-on sentences). I quickly put together a free website called magicformulainvesting.com that used a high quality database and that performed the calculations as I had intended. Unfortunately, it still wasn’t that easy to keep track of all the stocks, trades and timing that are necessary to follow the plan outlined in the book. In fact, my kids and I ended up having a tough time keeping track, too.