This month I selected Aspreva Pharmaceuticals (

ASPV) from the current MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I placed an order to buy 200 ASPV @ market (around $18.70). My US Stock Portfolio current situation is listed in the sidebar. I won't have to transfer any funds into my account to settle this month's stock purchase as one of my previous stock picks was taken over, so I have over $5,000 USD cash sitting in my account at the moment.

My portfolio has been hovering around an annualised ROI (XIRR) of 20% in recent months, although my current net gain is only 8.35% as I'm still slowly building up my portfolio (towards a total of 18 stocks accumulated at the rate of one new stock purchase each month). My success criteria is to achieve a return greater than the cost of funds invested (borrowed as part of a "Portfolio loan" from St George bank, so the interest rate is the standard variable home loan rate, around 7.25%), and my long-term target is to achieve a ROI of 10-20% pa.

After I'm fully invested with a portfolio of 18 stocks this December (approx. US$90K) I'll start to sell off the oldest holding each month and replace it with a new pick from the current MagicFormula list. Rather than rolling over the exact amount realised from each sale into a new stock, I'll invest 1/18th of the current portfolio value, adding in some extra cash when needed. That way I'll be investing roughly equal dollar amounts each month.

Copyright [url=http://enoughwealth.com]Enough Wealth[url] 2007

After reaching a high of over 20% annulualised return on investment (XIRR) my "Little Book" portfolio of US stocks suddenly plunged to have an XIRR of around just 7% last Friday. Although the stock market had been in decline for a few days, the magnitude of this plunge seemed too large compared to the wider market and NASDAQ index, so I looked at each stock in my portfolio this morning. It turns out that one of my sotcks,

EPIQ, had done a 3:2 stock split last week, which my google spreadsheet doesn't take into account. I'll have to have a look at my formulae and work out how best to adjust for stock splits without causing problems. I may have to create an new column to hold the original number of stocks purchased as well as the current holding. Anyhow, in the meantime just take the performance figures quoted in the side bar with a grain of salt

The other concern was why the price of my newest purchase, AVCI, had suddenly dropped the day after I bought it ("just my luck" I thought) - it turns out that there was a special $2.00 dividend, and the stock went ex-dividend the day after I'd bought my holding! This will be a pain as I'll have to pay income tax on this unexpectedly large dividend, but it's much better than a loss.

Enough Wealth

This month I selected AVICI Systems (

AVCI) from the current MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 520 AVCI @ market (around $9.52). My US Stock Portfolio current situation is listed in the sidebar.

My portfolio had recently reached an annualised ROI of over 24%, but in the last few days it has dropped back slightly to currently have an XIRR=22.84%. My success criteria is to achieve a return greater than the cost of funds invested (borrowed as part of a "Portfolio loan" from St George bank, so the interest rate is the standard variable home loan rate, around 7.25%), and my long-term target is to achieve a ROI of 10-20% pa.

After I'm fully invested with a portfolio of 18 stocks this December (approx. US$90K) I'll start to sell off the oldest holding each month and replace it with a new pick from the current MagicFormula list. Rather than rolling over the exact amount realised from each sale into a new stock, I'll invest 1/18th of the current portfolio value, adding in some extra cash when needed. That way I'll be investing roughly equal dollar amounts each month.

Enough Wealth

This month I selected Jakks Pacific (JAKK) from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 200 JAKK @ $24.96. My US Stock Portfolio current situation is listed in the sidebar.

My portfolio had recently reached an annualised ROI of 20%, but in the last few days it has dropped back considerably. I won't be doing a serious review of performance and comparison to a benchmark (such as the Russell 2000) until I have a track record of at least five years to evaluate. My success criteria is to achieve a return greater than the cost of funds invested (borrowed as part of a "Portfolio loan" from St George bank, so the interest rate is the standard variable home loan rate), and my target is to achieve a ROI of 10-20% pa over the long term.

When I'm fully invested this December (approx. US$90K) I'll have a portfolio of 18 individual stocks (I'm buying one US$5000 lot of stock each month), and I will then start to sell off the oldest holding each month and replace it with a new pick from the current MagicFormula list. Rather than rollover the exact amount realised from each sale into a new stock, I'll invest 1/18th of the current portfolio value, adding in some extra cash when needed. That way I'll be investing roughly equal dollar amounts each month.

Enough Wealth

I updated my US stock portfolio spreadsheet using Google spreadsheet, and used the "publish" feature to create html code to display the current portfolio (with current prices linked into the google spreadsheet from google finance data) and performance in live tables in the blog sidebar. These tables will be automatically updated to show current prices, overall gain, and the calculated annualised return (using the XIRR function). It's quite a cool little tool, but I wish google finance provided data on the Australian market - currently they only supply data on the US, Japan and European markets.

I also just noticed that although this displayed OK using IE at work, it doesn't display properly using Firefox (although on my other site http://enoughwealth.com it DOES display OK with both IE and Firefox!). I'll have to edit the code to fit into this blog...

Enough Wealth

This month I selected Optimal Group (OPMR) from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 600 OPMR @ $8.48. My US Stock Portfolio currently stands as:
Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 28.89 21.03 200 28-Jun-06 24.16 130 $5,103.75 -$889.62 -14.84%
MOT 12.07 17.65 265 24-Jul-06 18.98 130 $5,675.59 -$557.68 -8.95%
MSFT 24.42 28.57 200 21-Aug-06 24.64 130 $6,933.62 $823.79 +13.48%
ASEI 22.88 52.60 100 18-Sep-06 49.51 130 $6,382.72 $244.97 +3.99%
PWEI 6.55 32.86 150 13-Oct-06 33.29 130 $5,981.07 -$208.27 -3.36%
OVTI 14.61 12.49 300 13-Nov-06 16.47 130 $4,546.78 -$1,578.82 -25.77%
EPIQ 14.05 22.15 320 11-Dec-06 15.65 130 $8,600.90 $2,393.97 +38.57%
CRYP 14.02 25.34 200 10-Jan-07 23.92 130 $6,149.74 $214.62 +3.62%
VRGY 48.43 25.23 270 14-Feb-07 18.29 130 $8,266.11 $2,143.75 +35.02%
KG 16.77 19.96 260 7-Mar-07 18.49 130 $6,297.29 $333.78 +5.60%
OPMR 16.89 8.48 600 10-Apr-07 8.48 130 $6,174.01 -$130.00 -2.06%
11 symbols Total(AUD): $70,111.57 $2,790.49 +4.15%

The commision amounts include an allowance of another $65 for selling costs. There is no allowance for dividends received (around $300) or interest paid on the Portfolio Loan (currently around $400 a month).
At the moment the performance of this portfolio is largely governed by what individual stocks I have selected (semi-randomly) from the Lists generated on the www.magicformulainvesting.com website. For example, in the first trade I was tossing up whether the buy H&R Block or Hasbro toys - in the end I chose to purchase HRB (which has dropped nearly 15%). HAS in the same period has gained in price. Over a period of several years, once I am fully invested (with a portfolio of 18 stocks), the performance of my particular portfolio should be more in line with what can reasonably be expected from application of the "Little Book" methodology.

I'm quite happy with how the portfolio is performing, especially as the above figures are in AUD and the portfolio is held in USD. With the AUD hitting a 16-year high today, my foreign exchange losses have impacted the ROI to date quite significantly.

I was going to "mirror" my US stock purchases with CFD purchases of equivalent value via CMC Markets, but none of the US stocks I was considering adding to the portfolio today are actually traded by CMC Markets. I may either use the CFD trading the hedge my currency exposure, or perhaps use it to by a core index holding of QQQQ or Russel2000.

Enough Wealth

There's nothing wrong with giving each form a unique ID number, after all the names of some forms like the "Foreign Person's U.S. Source Income Subject to Withholding" form don't exactly roll of the tongue. What amazes me is that even common forms (equivalent to our Australian annual "tax summary" statement) seem to get referred to by their "code name" eg/ "W2" or whatever.

Anyhow, back to the topic of this post - my 1042S arrived in the post today. It's really just of academic interest to me. As a non-resident I don't have to do a US tax return (as far as I know). The information provided is also of no practical use in filling in my Australian tax return (due after June 30). Even though there's a tax agreement between the US and Australia so I can claim a tax credit on my Australian return for any US tax already paid on my US dividends, the Australian system requires me to report all transactions in the Australian tax year (1 July - 30 June), so a Calendar year statement from the US isn't really much help. Also, the Australian return must list each individual transaction converted to the equivalent AUD value applicable at the time of the transaction. Theoretically this would mean looking up the exchange rate for the date each dividend was paid into my US broker account. But I'll probably just use the exchange rate that was applied to the funds I transferred each month to make my stock purchase - the variation in exchange rate will not have a material impact on the calculated amounts, as the totals for Jun-Dec 06 are only USD$60.25 in dividends and USD$9.04 US Federal tax withheld. As the Australian tax return often only requires whole dollar amounts for many items, the rounding error is likely to be much larger than any difference in exchange rate that occurred during a month.

I haven't quite worked out what my US broker is doing with my US dividend amounts - the first dividend sat in the cash account, and then was deducted from the amount due for the next stock purchase I made. However, subsequent dividends have simply accumulated in the cash balance of my US stock account for several months, and weren't credited against the amount due for subsequent monthly stock purchases. The amount is trivial, but it's still annoying to have a cash balance sitting in my US account unused and not earning any interest, when I then have to borrow that amount in Australia to pay for my next stock purchase in full! Hopefully when I start selling my first US "Little Book Portfolio" stock purchases at the end of the year (once they've been held 18 months) the amounts will be added to the current cash balance and be used to fund subsequent monthly stock purchases.

Enough Wealth

The login details finally arrived by email from CMC Markets today. After sending in another email to setup the initial password I was ready to install the MarketMaker software. The installation went well, with no hick-ups installing it under Windows XP. It took about 5 minutes to download and install. One annoying feature (which also happened when I installed Comsecs ProfessionalTrader software) is that the first time you run the installed application it checks for any updates - and finds heaps. Installing all the "updates" to the installed application took longer than the initial installation. It seems as though once a version is rolled out, it gets used as the installation version for ages. All subsequent updates are just cobbled together as they arise over time, so if you install the application a fair while after its been released there's a huge amount of outdated code to be replaced. A more customer friendly approach would be to keep the "installation" version always updated with the latest updates, so that new users wouldn't have to go through a lengthy update of their newly installed application.


Once it was finally ready to go, I started to have a play around. I doesn't have an intuitively obvious interface, but that's probably due to it providing heaps of functionality and trying to keep the default layout clean and simple. I had a quick read through the online manual, and I'll have to read it all the way through before starting to use the application to its full potential. CMC Markets has a "free 1 day course" available to new clients. I'm sure it will mainly be a lot of "how to easily make huge returns with absolutely safety" bumpf, but it might provide enough training on how to use the software efficiently to make it worthwhile taking a day off work to attend.

My first daily account update arrived by email from CMC Markets today. Nice to see the $1,000.00 balance with no fees taken out. There is an online account funding option available within the trading application, but you can only make payment by credit card and they charge a $1.50 fee per transfer. I'll do any funds transfers by BPay instead and save the cost. I still have to fill in and mail by bank account details to CMC Markets so I can get funds paid back out again.

Hopefully I'll have worked out everything by the start of next month when I'm scheduled to make my next monthly US stock purchase to add to my "Little Book" portfolio. I'll do a normal $5000 stock purchase through Comsec-Pershing, and at the same time duplicate the transaction trading a long CFD in the same stock via CMC Markets. As the US CFDs trade on a 5% margin, the extra cost will only be around $500, but it will, of course, be doubling my exposure to any rises and falls in the stocks I purchase. I'll do the dual trades for 18 months and compare the costs of both trading systems.

Enough Wealth

After faxing in a copy of my driver's licence and a rates notice confirming my residential address setup of my new CFD trading account was completed on Friday. They require a minimum initial balance of $1000 to start trading, which I sent electronically from my bank account using BPay on Friday. Once the funds hit their system on Monday morning I should automatically be emailed my account number and initial password and could start trading that evening (trading US stocks will be available from 1:30 am - 8am AEST). I thought it was a bit strange that the account details aren't sent as soon as the account is opened, rather than waiting until receipt of a funds transfer, but it doesn't really make much difference in the end. I found a pdf file listing the 500 or so US stocks that can be traded using CMC Markets CFDs, and most of the ones I've bought so far for my little book portfolio were listed. The few ones that were missing are the smaller, more speculative stocks such as OVTI and CRYP. This will mean an additional filter when picking new stocks to purchase for my US Stock portfolio over the next 18 months.

I plan on buying a CFD for the same value of stocks that I actually purchase each month using my Comsec-Pershing broker account. After 18 months when the stock holding and corresponding CFD are sold I'll be able to compare the costs and realised gain or loss made using each system and decide whether I'll continue purchasing US stocks or just trade CFDs for US stocks in the long term. With CFD trading there's the extra risk of losing the money I've paid for the CFDs if CMC Markets went out of business, but as there is only a 5% margin required to trade US stocks this risk should not outweigh the benefit of significant savings in brokerage in the long term.

I've been building up a portfolio of US stocks (my "Little Book" portfolio) since the middle of last year. One of the problems of trading US stocks from Australia has been the relatively high brokerage costs - using Comsec-Pershing it costs AUD$65.00 per trade. E*Trade Australia charges even more, and I haven't been able to find any Australian brokers that will trade US stocks more cheaply. Some readers have recommended US-based brokers which are cheaper, but before I take that route (with the associated hassles around transferring funds in USD to a US brokerage before making trades) I've decided to experiment with using Contracts for Difference (CFDs). These are quite a popular tool for day traders, as you can gain market exposure with low costs per trade (as little as $1) and trading CFDs has a built-in gearing effect (usually the trades are based on a margin of between 5% and 20% of the stock value being traded). I don't intend to try day trading (I think it's a zero sum game, which generally just transfers wealth from the casual day trader to commercial traders), but it looks like it may offer a cheaper method to implement by US stock portfolio strategy.

I applied online for an account with CMC Markets on Friday, and today their representative phoned to request a fax of some identification (drivers licence and a rates notice) to finalise opening my account. As soon as this is processed I'll be sent a login and can transfer the initial $1000 required to begin trading. Although there is a normally a monthly fee of around $40 to use their trading software with live stock price data from the ASX, as I only intend to trade US stocks this data isn't needed and I won't have to pay any monthly fee.

Trades of US stocks are generally on a margin of 5%, so I should be able to buy a CFD to gain equivalent exposure to a US stock as my Comsec-Pershing $5000 trade for only $250. The minimum fee of $10 is high as a percentage of the trade value (4%), but is very reasonable compared to the underlying stock exposure (0.2% of $5000). I'm not sure that all the US stocks I've picked for my "Little Book" portfolio would be available as CFDs - only 541 "constituents" of the US market are available from CMC markets.

There's also a fundamental difference between buying stocks and trading CFDs - in the case of CFDs you are basically buying a promise from the issuing company, in this case CMC Markets. The CFDs issued by CMC Markets are not tradeable by any other CFD company, and if CMC Markets went out of business my investment in their CFDs would be worthless.

Anyhow, to replicate my actual US stock trades with Comsec-Pershing over the next 12 months (US$60K worth) will only cost me around US$3K to buy the equivalent CFDs, so it's not going to be a hugely expensive experiment whatever happens. If it works out I could save US$600 a year in trading costs, which would add directly to the ROI of my "Little Book" portfolio.

This month I selected King Pharmaceuticals (KG) from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 260 KG @ $18.49. My US Stock Portfolio currently stands as:
Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 27.74 21.48 200 28-Jun-06 24.16 130 $5,534.66 -$ 820.54 -12.91%
MOT 12.89 19.01 265 24-Jul-06 18.98 130 $6,490.15 -$ 119.76 - 1.81%
MSFT 23.79 27.61 200 21-Aug-06 24.64 130 $7,114.15 $ 635.29 + 9.81%
ASEI 22.64 51.78 100 18-Sep-06 49.51 130 $6,667.52 $ 162.31 + 2.50%
PWEI 6.65 33.32 150 13-Oct-06 33.29 130 $6,435.75 -$ 124.21 - 1.89%
OVTI 13.68 11.82 300 13-Nov-06 16.47 130 $4,566.06 -$1,926.25 -29.67%
EPIQ 11.60 18.24 320 11-Dec-06 15.65 130 $7,515.84 $ 937.22 +14.25%
CRYP 12.42 22.84 200 10-Jan-07 23.92 130 $5,882.05 -$ 408.14 - 6.49%
VRGY 47.26 25.00 270 14-Feb-07 18.29 130 $8,692.85 $2,203.16 +33.95%
KG 15.56 18.35 260 07-Mar-07 18.49 130 $6,144.24 -$ 176.88 - 2.80%
10 symbols Total(AUD): $65,039.86 $ 362.09 + 0.56%
The commision amounts include an allowance of another $65 for selling costs. There is no allowance for dividends received (around $300) or interest paid on the Portfolio Loan (currently around $400 a month).
At the moment the performance of this portfolio is largely governed by what individual stocks I have selected (semi-randomly) from the Lists genereated on the www.magicformulainvesting.com website. For example, in the first trade I was tossing up whether the buy H&R Block or Hasbro toys - in the end I chose to purchase HRB (which has dropped nearly 13%). HAS in the same period has gained in price. Over a period of several years, once I am fully invested (with a portfolio of 18 stocks), the performance of my particular portfolio should be more in line with what can reasonably be expected from application of the "Little Book" methodology.
My US Stock Portfolio now has the following composition:


Enough Wealth

I continued to build up my "Little Book" portfolio of US stocks with my regular US$5,000 stock purchase of one of the stocks listed by the magic formula investing website. This month I chose Crytologic (CRYP) . Some of my previous picks have dropped considerably, especially OVTI, so my overall portfolio now has around 0% return after deducting buy/sell costs. Taking into account the interest on the money I've borrowed to make the stock purchases, I'm under water at this point. Not that it really means anything - I plan to stick to my investing plan for at least ten years before looking at the average return and volatility to decide if the risk-adjusted return is as expected.

My "Little Book that Beats the Market" Portfolio had a poor month, with several of the stocks dropping significantly. As my version of the "Little Book" strategy is to hold each stock for 18 months after purchase, then sell it and replace it with a new pick (unless its still in the short list), the monthly valuations won't really mean anything during the accumulation phase. Even once I start "rolling over" my holdings the annual returns won't show how well this strategy is performing - as it's meant to be a long term strategy. Hopefully after ten years I'll have some idea if it's achieving the target ROI of 15%. As this portfolio is being built entirely with borrowed funds, the ROI has to at least exceed the loan interest rate (around 8%) to be considered a "success" in the long run).

One reader has asked if this portfolio is hedged - the answer is "no" as I have no idea if the AUD will rise or fall vs. the USD over the long term (10+ years), and I'm not going to complicate things further by trying to guess the short term currency movements. Hedging without trying to actively "trade" currencies would just add another 1%+ pa to the costs of running this portfolio in the long term.

TRANSACTIONS THIS MONTH

BOUGHT: 300 shares in OMNIVISION TECHNOLOGIES [OVTI] on 13 Nov @ $16.47 - total cost USD$5,006.00 including $65 brokerage.

BOUGHT: 320 shares in EQIP SYSTEMS [EPIQ] on 11 Dec @ $15.65 - total cost USD$5,073.00 including $65 brokerage.

SOLD: No sale this month (portfolio is in accumulation phase - US$5,000 purchase each month for 18 months)

When selecting which stocks to buy I've been keeping clear of commodity (mining & oil) stocks as I think the "e" in their p/e rations may start declining within the next 18 months if commodity prices moderate as production increases meet demand.

PORTFOLIO PERFORMANCE:

I'm currently ahead by 6.86% (AUD$3,109.52) after deducting an additional $65 per stock holding for selling costs, but not allowing for loan interest expenses or dividends received.

Symbol 52-wk Range P/E Trade Shrs Trade Date Price Paid Commission Holdings Value Gain
HRB 19.80 - 25.75 24.95 23.55 200 28-Jun-06 24.16 130.00 $6,029.57 -286.18Down $286.18 Down 4.53%
MOT 18.66 - 26.30 12.35 20.71 265 24-Jul-06 18.98 130.00 $7,025.73 456.89Up $456.89 Up 6.96%
MSFT 21.46 - 30.23 24.13 30.19 200 21-Aug-06 24.64 130.00 $7,729.63 1,290.98Up $1,290.98 Up 20.05%
ASEI 36.03 - 93.86 26.89 65.81 100 18-Sep-06 49.51 130.00 $8,424.76 1,956.67Up $1,956.67 Up 30.25%
PWEI 18.15 - 38.16 4.32 34.75 150 13-Oct-06 33.29 130.00 $6,672.85 150.36Up $150.36 Up 2.31%
OVTI 13.45 - 34.49 11.09 14.49 300 13-Nov-06 16.47 130.00 $5,565.03 -890.42Down $890.44 Down 13.79%
EPIQ 14.31 - 23.40 8.52 17.02 320 11-Dec-06 15.65 130.00 $6,972.29 431.22Up $431.22 Up 6.59%
Total (AUD): - - - - - - - $48,419.86 3,109.52Up $3,109.50 Up 6.86%

nb. The average gain reported above is spurious as each stock has a different holding period, and the current prices have been automatically converted into AUD, while the buy/sell commissions I entered into Yahoo! portfolio haven't been converted. I'll start tracking ROI more accurately once I'm fully invested at the end of the first 18 months.

My "Little Book that Beats the Market" Portfolio has progressed nicely this past month, with the gains by ASEI more than offsetting the drop in MOT. I was tempted to sell my Motorola shares when they'd gone up so rapidly and appeared to be dropping back - but my version of the "Little Book" strategy is to hold each stock for 18 months after purchase, then sell and replace with a new pick (unless its still in the short list).

BOUGHT: 150 shares in PW EAGLE, INC. [PWEI] on 13 Oct @ $33.29 - total cost $5,024.29 [AUD $6,758.18] including $65 brokerage.

SOLD: No sale this month (portfolio is in accumulation phase - US$5,000 purchase each month for 18 months)

When selecting which stock to buy I've been keeping clear of commodity (mining & oil) stocks as I think the "e" in their p/e rations may start declining within the next 18 months if commodity prices moderate as production increases meet demand.

PORTFOLIO PERFORMANCE:

I'm currently ahead by 10.62% ($2,642.21) after deducting $65 for selling costs per stock. After deducting approx. $349.00 for interest paid on the loan to date (this portfolio is 100% geared) my total return is currently $2,293.21.



nb. The average gain reported above is spurious as each stock has a different holding period. I'll start tracking net gain (capital gain + dividends - selling costs - interest) once I'm fully invested after 18 months.

personal finance, investing, stocks

My "Little Book that Beats the Market" Portfolio has progressed nicely this past month, although the particular stock I added this month has had a rough start.

BOUGHT: 100 shares in AMERICAN SCIENCE AND ENGINEERING, INC. [ASEI] on 15 Sep @ $47.94 - total cost $4859.00 [AUD $6470.90] including $65 brokerage.

SOLD: No sale this month (portfolio is in accumulation phase - $5,000 purchase each month for 18 months)

When selecting which stock to buy I've been keeping clear of commodity (mining & oil) stocks as I think the "e" in their p/e rations may start declining within the next 18 months if commodity prices moderate as production increases meet demand.

PORTFOLIO PERFORMANCE:

I'm currently ahead by 5.62% ($1,204.90) after deducting $65 for selling costs per stock. After deducting approx. $236.52 for interest paid on the loan to date (this portfolio is 100% geared) my total return is currently $968.38.

nb. The average gain reported above is spurious as each stock has a different holding period. I'll start tracking net gain (capital gain + dividends - selling costs - interest) once I'm fully invested after 18 months.

Here's the first snapshot of how my "Little Book that Beats the Market" Portfolio (hereafter to be known as the "LBP") is tracking so far. I'll post and update every month:




Highlights of my LBP Plan:
* 100% geared using Portfolio loan secured against real estate equity
[loan interest rate currently approx. 7.25%]
* LBP performance target 15% pa [net of costs] over medium-long term [5-20 years]
* invest in monthly $5000USD lots (~$7000AUD) over an 18 month period
* pick one stock each month using the "Little Book" website list of prospects
[using filter criteria of >$127m market cap, and list 100 to pick from]
* stocks purchased using Comsec Pershing US brokerage facility
* sell each stock after 18 months, and buy a replacement using the realised funds
* fund interest payments on loan from my cashflow and any dividends received

I read "The Little Book that beats the market" while I was browsing through a bookshop several weeks ago. The author, Joel Greenblatt, is a Columbia Business School adjunct professor, and in this book he proposes that investors can achieve better than "market average" returns using a "value" approach to investing. It's an entertaining read, but I don't really think you need to buy the book unless you want it on your bookshelf - a quick skim through gives you the basic theory behind his approach to stock picking, and the data required to apply it yourself to Australian stocks isn't readily available (as far as I know), and everything you need for US stock picking is provided on a free website (see below). However, if you want to buy a copy for your investment library (or to wave around at dinner parties once you've made a million trading this system), amazon.com has it for about $13US (nb. if you use this link I'll get a 4% commision):



If you've read it in the local library (or bookshop) there is a website (magicformulainvesting.com) that conveniently provides you with lists of suitable US stocks that rank highly under his system. The data is apparently updated daily, so any time you want to pick a stock using his method you just log in, enter a couple of criteria (minimum market capitalisation and how many stocks to list), and voila - you are ready to take the plunge.

Over the years I've drifted into the semi-strong efficient market camp, and so I nowadays invest in Vanguard Index Funds as the "core" of my portfolio, but I still like to dabble in direct investments to add interest (and, if I'm lucky, some performance) to my stock portfolio. I wanted to start adding some direct investments in US equities to my portfolio this year, so when I read this book I decided to take the plunge into direct US share investing using this system to select stocks. The main adjustments required are to ensure that you hold each stock for more than twelve months so you get the 50% capital gains tax discount (in Australia), and to buy fewer than the 30 stocks he recommends to reduce trading costs. I intend to buy a stock each month and hold each of my stocks for 18 months so that my "churn" is reduced a bit. My total US portfolio will thus end up containing 18 stocks - enough diversification to achieve whatever performance this system can yield. The book advises selling each stock after 12 months, but buying US stocks through Comsec (via the US broker Pershing) costs $65US each way, which is a LOT more than the $5US trades available in the States. I'm buying a $5,000US lot each month, which means that my round trip cost per lot will be around $130US ie. 2.6% - or about 1.75% per annum. As Vanguard International Index Funds will cost around 0.75% per annum, you have to outperform the market by at least 1% to match simple indexing.

Prof. Greenblatt's private investment partnership, Gotham Capital, is supposed to have produced 40 per cent a year returns over the past 20 years. My "target" is to achieve 15% per annum return (after trading costs). I am borrowing 100% of the amount I am investing using part of a Portfolio Loan (line of credit) I have from St George bank. This has the same interest rate as our property loans (currently around 7%), so if everything goes well I'd achieve around 8% return using OPM (other people's money). Of course, if things don't work our I'll lose money hand over fist . As my total investment will end up around $90,000 US ($120,000 AUD) I expect the worst case would be around $36,000 loss (interest payments and capital if the investments average a 20% loss) - around 5% of my net worth. nb. Back-testing his formula between 1988 and 2004, Greenblatt only had one down year, with the magic portfolio returning 30.8 per cent a year, against a 12.4 percent annual return for the S&P 500. It wasn't clear whether the back testing used random selections of 30 stocks picked from the universe of stocks thrown up by the magic formula - I'll be just picking one from the list each month that catches my eye.

I've been using this system now for three months, having bought H & R Block (HRB), Motorola (MOT) and Microsoft (MSFT) so far. HRB has gone down since I bought it, MOT and MSFT up, so overall I'm up about 3% after round trip costs - I'll post a detailed update on how this portfolio is going each month... wish me luck!