Sell in May and Go Away...
“Sell in May and go away…and don’t come back ‘til St. Leger’s Day” is a somewhat tarnished pearl of stock market wisdom, sometimes known as the Halloween indicator. It purports to help investors increase their return, and avoid losses, by staying out of the markets from May until October 31st. Since St. Leger’s day in mid-September is the last day of the British racing season, about which we are mostly clueless, investors on this side of the Atlantic have substituted Halloween.
In what is certainly an apocryphal explanation of this chestnut, the first Lord of the Admiralty, when preparing his flagship in Portsmouth harbor for battle with the French in 1865, is said to have telegraphed, "Sail in May - we go; aweigh!" to his assistant, who erroneously relayed instructions to his broker to sell in May the First Lord's substantial financial holdings.”
Still, unlike the winning Super Bowl league indicator or the hem-length of women’s skirts indicator, two other popular stock market barometers, the Halloween indicator has been just consistent enough and reliable enough to pique our interest, if not to form the basis of investment strategy.
A recent study of global stocks over ten years showed that stock market returns during the period May-October had been mostly negative, or at least lower than the short-term interest rate during the same period. The effect was statistically significant in thirty six out of thirty seven national markets studied. On the other hand, last year, researchers, using historical information from Standard & Poor's, released new data suggesting that since 1933, the S&P 500 stock index has gained 2.5 percent on average during the months of May through October. (This of course excluded 2010, when it would have been a blessing to skip at least May and June.)
In truth, these seasonal patterns are just variations of market timing, back testing data to draw out trends that, though they seem so obvious and useful in retrospect, just don’t exist in real time. They are conceits of hapless investors as we endlessly seek meaningful patterns in the market like little children watching shapes in the clouds. Except with real money.
On a more serious note, it’s always easy to buy; harder to know when to sell. Even committed long term investors can appreciate some general guidelines on when to reevaluate an investment decision. Here are a few:
For stock investors, the single most important signal to sell is that the original rationale for buying the stock is no longer valid (assuming you can still remember the reason you bought it in the first place). Whether it was a new product or technology, market or brand dominance, or above-average earnings growth; a change in the fundamental value proposition for the stock should be a trigger for review and possible sale. Disappointing earnings reports are another trigger, earnings disappointments tend follow one after another; often it makes sense to consider selling after the first miss, as there are likely more to come.
Since many mutual fund buyers purchase funds based on their past performance, a change in management should signal a reevaluation of the investment’s long term prospects. After all, if the person or team who was responsible for the results is no longer there, how important are they for your future returns?
Price gains, or losses for that matter, are not in and of themselves good reasons to consider a sale. While some may say “you can never go broke taking a profit,” they inevitably settle for a small profit on a company that ends up making a fortune for other investors. This is often paired with the saying, “It’s not a loss until you sell”, which justifies bravely holding on to losing positions until they flatline. Numerous academic studies on securities that have had both dramatic gains and losses (Odean , Shefrin, Statman , Weber, Camerer ), show frequent sales and multiple owners with small gains on the way up, and a few committed hopefuls with outsized losses, on the way down.
Steven Weber, Registered investment advisor, and Gigi Harris, Dir., Client Communications, are members of the Bedminster Group, a fee-only advisor providing investment and financial counsel to clients in the Low Country since 1997.