Formula Investing with a Value

Mindset
Value Investing Congress
October 19th, 2009
The Magic Formula

Cheap Good
Quality
Stock Screening
Back Testing Disclosures
• Important Disclosures for Model Portfolio Performance Results
• Back-tested performance is hypothetical (it does not reflect trading in actual accounts) and is provided for informational
and illustrative purposes to indicate historical performance had the model portfolio been available over a relevant period.
These results are not intended to recommend trades or be considered investment advice. The results of the model
portfolio performance:
– Reflect the strategy of buying an equity portfolio of 24 top-ranked US listed equities that are within the 20% largest companies,
as measured by market capitalization. As of September 30, 2009, these companies would have market capitalizations of
approximately $1.054 billion or greater. The portfolio is rebalanced quarterly and after the initial rebalancing, stocks are held
for approximately one year. The ranking of these stocks is determined by a proprietary formula that considers two major
factors: return on capital and earnings yield.
– Use average composite returns that were calculated by initially establishing 12 model portfolios starting on the first day of
every month beginning on July 1, 1999 and ending on June 1, 2000. These model portfolios were then used throughout the ten
year period ending September 30, 2009.
– Are not based on actual trading and do not reflect the potential market impact of buying and selling securities, trade timing, and
security liquidity.
– Reflect the deduction of a quarterly management fee of 0.25% of total assets.
– Include dividends that are held as cash until the next quarterly rebalancing and are then reinvested into the new portfolio
holdings
– Represent a 100% initial investment in equities, while the actual results of using this strategy typically results in a small
percentage of assets in cash. This cash cushion would generally reduce overall performance in rising markets and improve
overall performance in declining markets.
• Back-tested performance results have certain inherent limitations. No representation is being made that any model or
model mix will achieve performance similar to that shown. Formula Investing reserves the right to modify its current
investment strategy at any time. Viewers should remember that past performance is no guarantee of future performance.
• The results of the S&P 500 Index:
• Include the reinvestment of dividends.
• Will have a volatility that is materially different from that of the model portfolio.

Past performance is not indicative of future results. This material is not financial advice. The data shown in these screens is for demonstration
purposes only and does not represent actual results. This is not a recommendation to purchase or sell any particular security. There is no guarantee
that the strategies discussed will prove to be profitable.
Periods of Underperformance:
Past 10 Years

2/1/06 – 12/1/08 5/1/02 – 6/1/03

34 months
+ 13 months
= 47 months

Past performance is no guarantee of future performance

Back Tested Total Returns
Ending 9/30/09

10 Year 5 Year 3 Year 1 Year

Model
+288.9% +72.3% +15.7% +13.4%
Portfolio

S&P 500
-1.5% +5.2% -15.4% -6.9%
Index

Past performance is no guarantee of future performance

Back Tested Average Annual Returns
Ending 9/30/09

10 Year 5 Year 3 Year 1 Year

Model
+14.5% +11.5% +5.0% +13.4%
Portfolio

S&P 500
-.2% +1% -5.4% -6.9%
Index

Past performance is no guarantee of future performance

 Back Tested Calendar Year Returns
10/1/99 – 9/30/09

1999* 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009** Avg

Model
+15.8 +8.8 +36.0 - 21.0 +51.6 +27.9 +21.7 +13.4 +15.4 - 36.2 + 45.9 +14.5
Portfolio

S&P 500
+14.9 - 9.1 - 11.9 - 22.1 + 28.7 +10.9 + 4.9 +15.8 +5.5 -37.0 +19.3 - .2
Index

*10/1/99 -12/31/99
** 1/1/09 – 9/30/09
Past performance is no guarantee of future performance
Back Tested 10 Year Long/Short
Returns

+13.1%

- 14.0%

10 Year CAGR:
Long Decile 1 – Short Decile 10 = + 12.3%
But…
Past performance is no guarantee of future performance
Long/Short Implications

50% more volatile than long Decile 1, with lower

returns

Therefore…
Past performance is no guarantee of future performance
Pa
Magic Formula:

Bad Candidate for Long/Short Arbitrage.

Great Candidate for Continued Long Term

Outperformance!

Past performance is no guarantee of future performance