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Contra guys: What you miss when you 'sell in May and go away'

Benj Gallander of the Contra Guys

Tibor Kolley/The Globe & Mail

One stock market aphorism that is bandied about regularly is "Sell in May and go away". The idea is that from May through September, markets typically fare more poorly than the October through April period. For some people, that logic is good enough.

Not so for us.

While we do appreciate simplicity, we feel dumping stocks based on this annual cycle while ignoring so many other factors does not make sense.

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The Stock Trader's Almanac showed that from 1950 to 2011, the average gain on stocks from May through October was 0.3 per cent, while November through April clicked in at 7.5 per cent. A dramatic difference for sure, but also a contradiction of the sell in May logic. While the gain is scant, it does remain positive.

Yardeni Research goes back even further, from 1928 and up to last year. It noted than June, July and August all featured gains, with those months coming in at 0.7 per cent, 1.6 per cent and 0.7 per cent respectively. In fact, for those investors who want to hone in further, it would be "wise" to sell in April, as May has been an overall loser since 1928, while fattening up at the end of the month for the June-August run and then dumping before September, the worst month of the year.

Selling to satisfy the maxim ignores other ramifications. There are associated costs with the sale and the repurchase later on of the desired stocks. We do like taking gains at this time of year if the stocks are at or above our initial sell targets. We also feel that this period is a good time to take tax losses. But for the rest of our portfolio, it is normally the time to delight in inertia, incur zero fees and hope that our positions will move in a positive manner.

Instead of Sell in May and go away, we suggest "Don't Buy in May and Go Away". Then sit on the cash, grab slim returns via GICs or their ilk and have the funds waiting for upcoming opportunities as markets and stocks ripen.

Now, what to do with money on the sidelines? When Benj appears on BNN's Market Call at this time of year, his third top pick is often cash, in order to have some ammunition ready for when bargains appear later in the year. Since we are investing in turnarounds, often that is when tax loss season is in full swing. That patience often helps lead us to outsized returns, both in the short and long term. The former is when the Santa Claus rally arrives. Longer term is when the stock moves upward.

When considering a trade, one thing we look for is an annual pattern. Certain companies have a seasonal flow when revenues and profitability are greater, which is reflected in the stock price. This is something we attempt to take advantage of, but as with many methodologies, it's far from perfect.

Ultimately all of these techniques are aimed at market timing, which is often derided, but we believe should be a vital component of an investor's toolbox.

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