April 28, 2010

I'm Selling In May and Going Away

Historically, markets* have usually out-performed their average returns during the period of November 1st through April 30th and under-performed during May though October.  As such,   many in the investment community are often tempted to "Sell in May and Go Away.” Adherents of  this strategy will sell all their stocks around May 1st, and then buy back into the market the following October 31st. Alas,  history does not always repeat itself and  had we done that last year, we would have missed a huge rally on Wall Street and I would have faced a veritable client revolution in November.

Given how well the market has done over the past twelve months, perhaps, this is the year that the theory will work like a charm.  Last week, I took a call from a client who thought there was an error on his March 31st investment account statement. Refreshingly, he actually thought the portfolio value listed on the statement was too high to be correct! I happily reviewed each item in the portfolio with him in order to convince him that the value was real. Now, if that’s not a sell sign, what is?

THE APPALACHIAN TRAIL BECKONS
Maybe, in a couple of weeks, I should just consider following the “sell it all” approach and head out on the Appalachian Trail (AT) with my backpack, hiking boots, compass and trail map. The AT, for the benefit of our local clients and friends, is an unbroken scenic hiking path that stretches along the east coast from Georgia through Maine (yes, to the exclusion of our great state of Florida.) For those of you locals having a hard time with that concept, try to envision the AT as a kind of an I-95 expressway minus the cars, noise, pollution and asphalt. Instead, there are unpaved hiking paths surrounded by  trees, rocks, and critters. The air is fresh and sweet.  Along the trail one finds hard core hikers, eccentrics, lost souls, tree-huggers, the unemployed, and of course, money managers that “Sell in May and go away”. 

BUT HAS THE MARKET PEAKED?
The “sell in May and go away” concept has nothing to do with market peaks. Rather, it’s more of a seasonal timing device that has historical credibility. In any event, one still wouldn’t want to blindly follow this guidance and miss a major upturn in the market, such as the one we experienced last summer. As I was writing this piece, I took a break, and referred to my trusty charts and financial metrics and indicators. Things are looking up! Corporate profits are way up, retail sales are increasing, and new jobless claims are down. Real estate sales and new home starts, auto sales and orders for durable goods are all up. Virtually all economic indicators are bullish.

While this may be very good news for investors, it doesn’t bode well for my plan to follow the “sell in May” dictate and embark on the   AT trek.   I’m thinking now that it would be a better idea to postpone my AT adventure for at least a month, so I can continue to monitor economic indicators. This new kink  in my  plan is somewhat deflating, as the notion of hiking a couple of thousand miles and sleeping under the stars with a new group of friends was becoming increasingly attractive to me.  Do I dare risk such a bold deviation from the standard wisdom?

Could I instead create my own Wall Street maxims for future generations of investors to follow, thus ensuring my own Wall Street legacy?  Depending on when I hit the AT, I can call my new maxim, “Sell in June before your investments swoon”, or perhaps, “Sell in July and keep values high?”

WALL STREET MAXIMS AND ABSOLUTES
In my experience, Wall Streets maxims can be divided into three broad categories. The first category includes maxims that have some historical basis, but are so farfetched that I drop them into the ridiculous bucket. They are based on fluky correlations rather than actual causal relationships.  They sort of rely on the same type of principle as the one behind Groundhog Day.  Examples of the ridiculous are “the hemline theory,” i.e., markets will rise when the hemlines of skirts are rising or fall when hemlines are dropping; Or the “Super Bowl theory,” i.e., markets will rise or fall depending on which team wins the football title. Good luck to investors who hire managers that ascribe to these theories.

The second category of maxims are based on relationships and factors of a   more technical  nature including perennial favorites such as price/ earnings ratios, inflows/ outflows, inventories, money supply, unemployment, interest rates, etc.

The final category of maxims are what I call the classics or the near absolutes; theories, metrics and strategies that money managers are taught have historically produced the best results and always need be followed when constructing and managing long term portfolios; i.e., risk adjusted asset allocation, efficient market theory, diversification, etc.

THE TRUTH ABOUT MAXIMS
What I have learned over a long career and especially over the last ten years is that there are no absolutes. Certainly, the conventional wisdom needs to be understood and studied by money managers. However, successful money managers also need to possess a healthy amount of skepticism and need to be open-minded enough to recognize when to ignore conventional wisdom and maxims. The recent global panic and near collapse of the financial system are prime examples of why this is so. At least in the short-run, no conventional theory worked to avoid losses in the marketplace, and no maxim paid any kind of dividend.

In addition to studying theory and technical aspects of markets, a successful money manager must also have the confidence to stick to his guns, filter-out the superficial nonsense that the 24 hour media calls “sound advice” and to sometimes just “say no” to those who ask him to follow what he knows from experience, is the wrong path.

The reality is the world economy and the markets never sleep and a responsible advisor can never just “go away.” Yes, we can get away, but complete detachment? For me that is not in the realm of possibility.

UPDATE ON MY SUMMER PLANS
Well folks, I guess I’m still here. If you happen to look into my office, you are going to see this guy in a white shirt and tie, with polished shoes, sitting at his desk. On the desk are a couple of   flashing computer monitors, the Wall Street Journal, a telephone with blinking lights, and a half-cup of day old coffee. Behind him on a shelf are family photographs, along with a group of photos of this financial advisor in a suit, shaking hands with other people in suits who are more famous than he is.  On the floor, in orderly rows, are the current days files containing wills and trusts requiring review; investments needing to be vetted; and a pile of trade journals, many of which he will never find time to read. In short, at first glance, at my office it’s “business as usual.”

However, for those who take the time to really see, or perhaps possess a keener sense of vision, there appears to be something that doesn’t quite fit in with it all.  There in the corner, suddenly in plain sight, is a grouping consisting of a hiker’s  backpack; a  pair of worn-in, mud encrusted hiking boots, a compass, and a stained and withered trail map.

If the image becomes clear enough you can even begin to smell the sweet woodsy fragrance and to hear the melodious cacophony of singing birds that wait along the Appalachian Trail…

Happy Trails

Austin A. Frye, MBA, JD, CFP®

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