Questions about strategies and calculations

We get many questions about our strategies.

Please read this before you decide to follow a strategy.

 

About the historical calculation.

The historical calculation (or backtest) is simulating the historical progress as close as possible. To do this, we use the company's report history and historical stock prices.

We use the company's full-year reports to give a long history.

 

It’s important to know that the historical calculation is not perfect.
There are several parts that will affect the result that we do not use in the calculation.

Examples are companies that have changed markets, courtage costs and unlisted companies.
These cases are described below in more detail .

 

About the list "The best stocks right now!".

This list uses the most recently released quarterly report (rolling 12 months), which means that this list always shows the best companies right now. This list may change daily depending on stock price and new company reports that come in.

When we calculate all key ratios each day with the latest share price, based on the last 4 quarterly reports (Rolling 12 months), this list will provide a true picture of the strategy based on today's data.

This list can affect each day, due to stock price and new reports.

 

Why does the historical calculation differ from the "right now" list?

The historical calculation of the Strategies are created from full-year reports so that we can demonstrate a long historical development.

The list "The best shares right now!" are calculated from the latest rolling quarterly reports. This gives a more accurate value than using the latest full-year report.

Since the two calculations have some different report data, the same shares will not always appear in the historical list shown in the Just List.

For example, a share may be due to a quarterly report high on the list and displayed in the Just List. But when the annual report is released, the stock will be further down the list.

 

Why can I not choose January and February in the Monthly List?

We cannot buy an annual report before it is released on the market.

As most annual reports are released at the beginning of the year, we do not want to calculate full-year reports in this period. Then many company calculations would be based on almost one year old reports.

Therefore, we simply chose not to have Jan, Feb on the calculation.


How is the historical calculation of the Magic Formula made?

For each year to be calculated this happens.

  1. Remove all financial companies (If selected in filter).
  2. For each company, download the latest report and share price for the selected month. The stock price is always the first day of purchase of the selected month. The report must have been released on the market before the selected month.
  3. For each company, calculate ROIC and save all companies in a list. Companies with negative ROIC are removed.
  4. For each company, calculate EY and save all companies in a list. Companies with negative EY are removed.
  5. Sort the ROIC list so that companies with the highest ROIC come first.
  6. Sort the EY list so that companies with the highest EY come first. Each company gets a value that is the sum of its position in both the ROIC list and the EY list. If HM is in position = 2 in ROIC and position = 56 in the EY list, then the value of HM = 58 (2 + 56). This value is its location according to TMF.
  7. All companies are sorted by the TMF value, so companies with the lowest value are listed first.

Now we have a company list for each year. Now we buy the selected number of companies from the top of the list.

This calculation is basically the same for all strategies.

 

Unlisted companies - both negative & positive impact

On stock exchange data we have no history of older unlisted companies.

These are not included in the historical calculation (backtest).


Survivorship bias = Unlisted companies are not included in the back test. Indirectly this gives both positive and negative impact in the final result.


Positive Impact = When listed companies have fallen sharply or have gone bankrupt. However, those companies with poor FA values ​​rarely end up in the Magic Formula strategy. It is therefore good to ensure "pre-filter" to remove a larger proportion of poorer FA companies.


Negative Impact = There are also many companies that have had good FA values ​​and have been well-trained that have been purchased from the stock exchange. The likelihood that these companies would rank higher up in the Magic Formula list.

 

List change - positive impact

On stock exchange data we have no history of listing changes, and therefore this has an indirect effect when the companies that end up in the Large and Mid Cap are also the ones that give the best result.
When we choose companies from Large and Mid Cap and backtest on the historical progress, it may equally be companies that have previously existed in the Mid and Small Cap or even further down the lists like First North.