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 fact...you 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.

Memo from Broker: Stop Trading

I received a surprising email from one of the brokers that covers my company earlier this week.

Brokers, of course, earn their keep by having their customers buy and sell securities.  However, whether this make sense from investment perspective is another matter.

My broker forwarded a copy of a recent "Buttonwood" column from last week's Economist magazine which noted that recent studies would suggest a direct correlation between high trading volumes and subpar returns.

Here's an excerpt:

The academics looked at the record of 1,758 American equity mutual funds between 1995 and 2006. They estimated trading costs by looking at changes in portfolio holdings (which are revealed every quarter), checking the bid-ask spreads for the stocks concerned and making an allowance for the price impact of trades....

Higher costs would not matter if the trading decisions of the fund managers were sufficiently astute. But that is not the case. When the academics compared the returns of the funds with their estimated trading costs, the funds with the highest costs had the lowest returns. The return gap between the highest- and lowest-cost quintile was 1.78 percentage points a year.

http://www.economist.com/news/finance-and-economics/21576683-fund-managers-trade-too-much-retail-investors-can-learn-not-dont-just-do?frsc=dg|a&fsrc=scn%2Ftw_app_ipad

The article goes on to note that managers seem to trade much more frequently than in prior periods.

In the 1950's, for example, the average fund turnover was 15%.  By 2011, however, the typical fund manager turned his portfolio holdings over by +100%.

Buttonwood puzzles as to why mutual fund trading seems to have increased in light of the evidence that it does little to improve returns.

In my experience, I would suggest that clients often confuse active management with active trading.

Walk into a client meeting with no transactions for the prior quarter will often raise questions, even if relative performance has been strong.  Somehow there is always the gnawing sense that the manager has been asleep at the switch if positions haven't been jumbled up.

The great growth stock investor Phillip Fisher used to say that his favorite holding period for a stock position was "forever".  His philosophy - which was laid out in his seminal investment volume Common Stocks and Uncommon Profits (pictured above) - was influential to many, including a fellow named Warren Buffett.

Fisher's philosophy of buying quality stocks that the investor had thoroughly researched and followed seems quaint today, but Fisher compiled an admirable investment record in his day.

However, I worry about a broker who sends her clients an article suggesting they stop trading - is she trying to tell us something?