Monday, August 19, 2013

Sell in May and Go Away

It used to be, in a by-gone era, that Wall Street took a summer holiday.

Traders and investors would sell their positions in May, and take a complete break from the markets until after Labor Day. This is in part the genesis of the the old adage "Sell in May and Go Away".

Stock prices would be weak in the summer months not because of any fundamental reason other than a lack of attendance by any serious investors.

Not any more.

Today is my first day back in the office after spending a week on vacation with my family on Nantucket.  However, I am sorry to report that technology "allowed" me to stay in touch with the markets and the office for most of the week.  Judging from what I saw, most people shared a common experience.

In 21st century America, taking a complete break from the world is becoming rare.

But it is not clear that this is necessarily a good trend.

Seth Hamed is a broker who covers my company from the brokerage firm Stifel Nicolaus. Last week he forwarded an old but excellent article authored by the late Barton Biggs. 

Biggs was chief investment strategist for Morgan Stanley for a number of years before working at a hedge fund.  Biggs was an extraordinary writer in addition to a superb strategist, and I used to love to read his weekly pieces.

In a 2003 article titled "Noise and Babble", Biggs discussed the challenges of trying to weed through the volumes of information thrown at portfolio managers.

Every investor agrees that it is important to focus on the long term, yet in today's investing world everyone seems hyper-focused on every twitch and turn in the markets.

How many times do you hear someone say "Why is the market up {or down} today?" when the simple truth is that no one really knows. Yet we continue to search for answers.

After noting that the pain from losses is greater than the pleasure from investment gains, here's what Biggs wrote:

But to the extent that the investor is focused on the daily or even minute-by-minute performance of his or her portfolio...the time of pain is inadvertently increased and the time of pleasure reduced.  And this is a particularly bad tradeoff, since moments of pain are more poignant than the times of pleasure reduced.   The problem is...that investment pain leads to anxiety, which in turn can cause investors to make bad decisions.  In other words, continual performance monitoring is not good for your mental health even though contemporary portfolio management systems and their suppliers strenuously promote it.  In will probably be a better (and happier) investor if you only deal with monthly or maybe even annual statements.

Unfortunately, in the decade since Biggs wrote this insight, the barrage of information has grown, and the ease of access along with it.

But perhaps the old investors had it right:  Maybe we really should just turn off the monitors in May, and not check prices until the fall.

If only.