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“Sell in May and Go Away!”

“What?”

Many of us must have heard of this investment cliche. However not all of us might actually know how it came about and more importantly does it even work now?

What Does This Cliche Actually Mean?

 

This actually refers to a trading strategy based on seasonality.

How this works is that an ‘investor’ will sell their stock holdings in May and only get back into the market at the end of the year to avoid the typically volatile summer months.

There were some studies that demonstrated that over a certain period in the past, returns of such a strategy had some support. However, results appeared not to be that conclusive with critics on both ends of the argument.

 

How Did This Cliche Come About?

 

To understand the origin of this cliche, it is good for us to go back in time.

In the old days, the extended version of this saying was “Sell in May and go away, do not return until St. Ledger’s Day.”

To provide some context, May was when the summer started in old England. Hence many stock brokers and traders would start to go for their summer vacation in May and not return until September and St. Ledger’s Day tend to fall on the final horse racing days of the season. This led to trading being relatively flat from May to September (Summer) as these stock brokers did not bother going back to work until the racing season had ended!

At that point in time, this might have been a legitimate reason for a lull in trading. However with the world we are in right now, I don’t think that the stock traders and brokers take an entire summer off!

 

And Here Are A Few Other Cliches To Entertain You Today!

 

1. The January Effect

This strategy will be to purchase stocks prior to January.

The rationale behind this could have come from these 2 factors:

i) Market participants sell in December to take advantage of tax losses to offset capital gains

ii) The practice of ‘window dressing’ whereby these market participants sell their ‘losers’ at year end to present a better picture to their clients

In both these cases, these market participants would then proceed to buy back the previously sold stocks again prompting a rally in January!

 

2. Buy The Rumor, Sell The News

This is pretty much a 50-50. In essence this strategy involves market participants trading stocks up into ‘big’ events and then more often than not selling after the hype or in other words, after things become official.

 

3. And Finally We Have The Classic – “Buy When You Have The Cash To Invest; Sell When You Are Ready To De-Risk”

Well Captain Obvious, we were waiting for you to show up…

 

Value In Action

 

At the end of the day, we all have to understand that these cliches mainly originated from stock traders and stock brokers and might have been applicable in the past.

However in this day and age and furthermore as value investors (We need to have a clear distinction between an investor and a speculator), we feel that such cliches do not have a significant impact in our investment decisions. If you are a trader or broker that goes in and out of the market in days or even hours, there might be other market signals to watch out for. Another crucial point about these cliches is that their empirical results are more often than not from an analysis over the broad market but they do not reflect the impact of a single stock. An extreme (In a good way) example will be buying and holding Warren Buffett’s Berkshire Hathaway through the years. Although I do have the empirical evidence to back up this point 100%, I think that the convenience of investing in a great company outweighed the effort for a trading strategy based on seasonality. And I don’t think that we can be too upset about Berkshire’s performance 🙂

So if you are an investor with a long term investment horizon, I think that there are more important things to focus on instead of these cliches.

Some questions include:

1. What does the company sell?

2. Who are the customers?

3. Is the company making money or expected to make money?

4. And most importantly, why does there seem to be value at current prices?

 

Cheer 🙂

 

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded.The information provided is for general information purposes only and is not intended to be any investment or financial advice.

All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.

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