The Little Book: That Still Beats the Market

Step-by-Step Instructions

HERE'S THE BIG PICTURE. As you know, the magic formula has achieved excellent results in the past. So our goal is to create an easy-to-follow plan that will help reproduce those good results. But before we adopt any strategy, we need to consider a few things.

First, since the returns reported in this book were based on holding a portfolio of roughly 30 stocks selected by the magic formula, we should make sure that our plan includes holding at least 20 to 30 stocks at one time. Remember, the magic formula works on average, so holding many stocks that are ranked highly by the magic formula should help keep us close to that average over time.^[39]

Second, in our tests, each stock was held for a period of one year. Holding stocks for one year is still fine for tax-free accounts. For taxable accounts, we will want to adjust that slightly. For individual stocks in which we are showing a loss from our initial purchase price, we will want to sell a few days before our one-year holding period is up. For those stocks with a gain, we will want to sell a day or two after the one-year period is up. In that way, all of our gains will receive the advantages of the lower tax rate afforded to long-term capital gains (a lower tax rate under federal guidelines for stocks held more than one year), and all of our losses will receive short-term tax treatment (a deduction against other sources of income that otherwise could have been taxable at rates up to 35 or 40 percent). Over ...