March 2009
June 2009

Magic Formula
Sunday Times Challenge

The Sunday Times is running an interesting and fun series called the DIY Challenge. Essentially its all about mechanical investing methods, but on mini-portfolios of only 5 shares.

We will be submitting our own portfolios to Robert for hopeful inclusion in the challenge and also track the performance of our portfolio versus the ones below in a Strategy Blog we created for the challenge. We have copied the text from the article that launched the challenge below. It was written by Robert Laing.

Do-it-Yourself Investing: Share Portfolio Challenge,
Robert Laing, Sunday Times

Try your luck at beating these hands
Active or passive? This is a hot topic in fund management, with the world’s most successful investor, Warren Buffet, betting $1-million against fund managers Protégé Partners LLC that they won’t beat the S&P 500 blue-chip index over 10 years. Buffet and others argue that any advantage active funds have over passive index trackers gets eaten by the overhead costs of all the research involved in beating the market average.

Indequity, a team of professional fund managers who manage unit trusts, has challenged Business Times Money to a simplified version of Buffet’s wager. This is a rerun of a similar challenge this paper ran in 2006, and just a friendly bet to illustrate stock picking techniques. Indequity’s five-share portfolio picked by its quantitative analysis methods will be pitched against two common index trackers. The buying price we’ll use is the volume-weighted average price at deadline. The portfolios will change over the coming year, but will always have five shares.

We will keep a running total of the gains and losses in each “slot”. Dividends will be added to these gains or losses. An oversimplification in this challenge is trading costs; Indequity’s administration fees are not taken into account — which is a key point in Buffet’s argument against trading in actively managed funds.

Big Five
The idea is to make this a mini “blue-chip index tracker”. These are the JSE’s five biggest companies by market capitalisation, putting it at odds with the official Top 40 blue-chip index tracker which excludes the share at the top of the list, British American Tobacco, because it is a “foreign inward listing”. Like the Satrix Top 40 and other blue-chip index trackers, the Big Five’s portfolio will be updated once a quarter to reflect the prevailing market cap ranking.

Jilted By the Jse These five have been picked by the “Dogs of the Dow” theory that the higher the dividend yield, the better bargain the share. A serious flaw in this investment method has been brought home by Anglo American and Mutual & Federal: generous dividend payments in the past are no guarantee of any dividend getting declared in the coming results. Mechanically picking shares by dividend yield is a blindfolded walk into a minefield. Until it was delisted on Wednesday, NEI Africa was well in the lead with a dividend yield of 3000% . The share was a “cash shell” — shareholders had received a one-off payout for the company’s assets, but some money was left in a bank account in the hope of attracting a “reverse listing”. NEI Africa failed to meet the JSE’s deadline for attracting new assets and was removed from the boards. This leaves Wesco in top spot, another cash shell left after Toyota Japan turned its South African operations into a wholly owned subsidiary. So applying the “Dogs of the Dow” theory means introducing more rules than just looking at a share’s dividend yield. Funds which follow it, like the Satrix Div+, often limit their selection to blue chips. To make the “Jilted by the JSE” portfolio a bit more speculative without being completely reckless, we’ll set the minimum market capitalisation at a lowly R100-million. This scratches cash shells off the list, along with Finbond Property Finance (dividend yield 32%, market cap R74-million) and Workforce (dividend yield 18%, market cap R60-million), leaving us with the five shares in our “Jilted by the JSE” table. The “Dogs of the Dow” requires patience, so this portfolio will remain unchanged for a year.

Reader Challenge Think you can beat these portfolios with your own selection of five shares? E-mail your mini portfolio to

After posting the first quarterly results of this competition, where a private individual achieved 43.8% growth with his portfolio submission versus the Quants' 19.3% we wrote the following response to the Sunday Times regarding the results which was published as a letter.

Letter published in Sunday Times with the heading "Stock competition heats up with top prizes"

"Dear Robert With regard to last week's article about the share competition, where you mentioned you still had not finalised a prize for the next round. We are pretty impressed with some of the performances of the top portfolios of your readers and sometimes the results at the top are so close it's a shame to give only a first prize. PowerStocks Research, in association with ProfileData  are willing to sponsor the following prizes worth R58,592 to spice things up for your contestants for the next 4 quarterly competitions:

Four Quarterly 1st /2nd place Prizes (total 8 prizes worth R15,196)
1st  Prize - ShareMagicLITE technical analysis software with 12 month JSE data subscription  worth R2,600 (

2nd Prize - 6 Months subscription to  PowerStocks Research (  worth R1,199

Three 6-Month 1st /2nd place prizes (total 6 prizes worth R30,597)
1st Prize - ShareMagicPRO Technical & Fundamental Analysis software with 12 month JSE data subscription  worth R8,200 (

2nd Prize - 12 Months subscription to  PowerStocks Research worth R1,999

One 12-month 1st,2nd,3rd place prize (total 3 prizes worth R12,799)
1st Prize - a copy of ShareMagicPRO Technical & Fundamental Analysis software with 12 month JSE data subscription  worth R8,200

2nd Prize - 12 Months subscription to  PowerStocks worth R1,999

3rd Prize - a copy of ShareMagicLITE JSE technical analysis software with 12 month JSE data subscription  worth R2,600

In addition, we are pleased to be able to offer fully functioning demo copies of ShareMagicPRO to the first 100 readers that email with their street/work addresses, so we can have the CD's with the JSE database delivered to them.

PowerStocks research is a technical analysis research provider for private JSE investors and ShareMagicPRO is fundamental to all research/analysis provided on our web site. ProfileData undertakes research and delivers investment data as customised data feeds and web pages. Core delivery areas include JSE data, unit trust data, company fundamentals, and database systems integration. ProfileData supply the monthly offshore fund performance figures for the Sunday Times.

Make a Free Website with Yola.