Quarterly Review – Magic Formula Stocks

It is the year end and time to review  portfolio perfomance. I started this blog in September and focussed on magic formula investing since the returns using this simple approach has been much better than the index. I usually review the my portfolio every quarter for stocks listed in my magic formula sheet. Time permitting I will post a detailed writeup on my capital allocation and churning of portfolio, but for now let us look at the quarterly returns of the Q4 portfolio as compared to sensex.

Company Name	Price on 30 Sep	Price on 31 Dec	% Gain/Loss	Units	Value as of 31 Dec 2009
Gujarat State Fertilizers Company	176.3	190	8%	57	10777
Gujarat Fluorochemicals	161.5	130	-20%	62	8050
ICSA India	209.3	180	-14%	48	8600
Orient Paper and Industries	54.3	48.4	-11%	184	8913
Lakshmi Energy and Foods	136.55	155	14%	73	11351
Birla Corporation	298.45	334	12%	34	11191
Indian Metals & Ferro Alloys Ltd	396.35	548	38%	25	13826
MIC Electronics	53.25	45.2	-15%	188	8488
Mahindra Satyam	119.1	98	-18%	84	8228
FAG Bearings India	471.5	611	30%	21	12959
HCL Infosystems	150.2	153	2%	67	10186
Balmer Lawrie and Company	490.75	573	17%	20	11676
Mastek	299.95	414	38%	33	13802
Nava Bharat Ventures	375.6	410	9%	27	10916
NIIT Technologies	123.1	179	45%	81	14541
Coromandel Fertilisers	208.85	237	13%	48	11348
Supreme Industries	335	384	15%	30	11463
VST Industries	446.35	525	18%	22	11762
Voltamp Transformers	831.7	915	10%	12	11002
KPIT Cummins Infosystems	78.2	127	62%	128	16240
Tata Elxsi	176	258	47%	57	14659
eClerx Services	376.2	415	10%	27	11031
TRF	523.95	671	28%	19	12807
Bajaj Electricals	640.25	817	28%	16	12761
Shree Cements	1653.3	1926	16%	6	11649
Esab India	436.35	535	23%	23	12261
Sesa Goa	265.7	410	54%	38	15431
Tech Mahindra	936.15	990	6%	11	10575
Glodyne Technoserve	409.85	469	14%	24	11443
Sensex
	17126	17464	1.97%
Portfolio Value as of 30 Sep				290000.00
Portfolio Value as of 31 Dec				337937.39
Increase %				16.53%
Sensex Gain during the period				1.97%

As  you can see the total return from the portfolio is over 16% whereas sensex returned about 2% during the same period.  It cannot get any simpler than this.

You may think 16% in 3 months is no big deal. It sure is not. But for me, it makes good investment sense. You can also say that there are stocks that have almost doubled since then, honestly there are but there is no way I would have known. One very important aspect of stock movements is general market sentiments and I guess only an astrologer might help with that. I dont even know what I am having for dinner tonight, how on earth would I know where market is headed !!! If the sentiments are positive all stocks will move up and stocks that give you 100% in a month or so can also cause capital erosion when things are not so bright.

When I invest in stocks that have market capital in excess of 500Cr and are below their industry PE, with low debt, low PE and high ROCE, I am certain that I will not lose money and the returns including dividends will certainly be higher than an average fixed deposit. What I also do is every quarter replace the worst performing stocks with good ones from the new magic formula sheet. I do that religiously without much thought process. As a result very seldomn does my entire porfolio turn red.

Two rules  I deligently follow are -

• If the stock drops by 20% I exit and replace with the largest company in the new list.
• If the stock gains by 50% I exit. If it is listed in the new list as well, enter again.

By doing this I am certain that I will never lose more than 20%  on my entire portfolio. Now, if the stocks listed lose 20%, 5 times in a row does it make that 100% .. thats simple math, it doesnt. Your entire portfolio will be down by 67 %, and it is very unlikey that magic formula will list stocks that are going out of business.

 You comments, suggestions, criticism and opinions are welcome !!!! Please read the disclaimer. The amount mentioned in the portfolio are only for reference (Rs, 10,000 invested equally in all scrips).