How I encountered MFI

I've been reading Smart Money for years, but had never done much investing in individual stocks. In fact, I usually skipped the individual investment sections and went to the back and read about ways to save, long-term financial planning, etc. However, I always skimmed the investment sections, particularly the stock screen article.


Around February 2006, they had an article where they ran a stock screen using mfi. I was intrigued by the general concept and dropped their stock picks into a tracking portfolio. Then I picked up the book and was even more intrigued. I started playing around with a couple of "test" portfolios, where I tried to be clever as to how to pick them. First, I tried to only pick the top earnings yield, but only if the ROC was greater than 100%. Then, I tried my hand at doing a little research on the stocks.


When I bought my first tranche in March 2006, I used a combination. First, I picked American Eagle Outfitters (AEO) b/c that was on the Smart Money screen, had done very well already, and was still on MFI. I know I missed a nice run up, but I figured I'd try it since it was still there. Ultimately, I did well...a year later I closed that position with a 50% gain. But, I mostly used the system of picking the best earnings yields. I ended up with Forward Industries (FORD), as a result. 50% loss! Ugly! (Had I kept it past a year, it would now be at a 63% loss. Complete stinker). The saving grace was the purchase of Pinnacle Airlines (PNCL), which I ended up closing with a 145% gain. Very nice.


At the same time as this, I continued to try test portfolios. I found that the best thing I could do was enter no bias into it whatsoever. So, by the second buy in May 2006, I went completely random, courtesy of random.org, which is a ridiculously fun website. Let me declare what a geek I am to the world. I had previously used this site to shuffle up my 750 cd collection to force me to listen to albums I hadn't listened to in a while. GEEK.


Well, now what I did was put in my parameters in mfi.com: 25 top picks over $50M market cap. I'd use random.org to randomly shuffle the sequence of 1 - 25. Then, I'd start going right down the list in order, skipping only stocks that I already owned.


The results? Well, very, very good so far as you can see from my earlier post. My May 2006 block of stocks did 27% vs. 15% for my benchmark. There were two early cash mergers (Kerr McGee (KMG) and Portalplayer (PLAY)) which both did well. Marvel (MVL) and Viropharma (VPHM) were great and my only stinker was Fording Canadian Coal Trust (FDG).


Fording actually ended up being an interesting one...I lost money on that one in a year, but it was still in the screen when it was time to buy new stocks and I chose to keep it (and, since it was down, even had to buy more). Interestingly, at this point, not only is it up, but it has almost recovered everything I lost from 5/06 to 5/07. Maybe there's something to this MFI thing after all! :)


More on the background to come before we can move forward...


-A