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Anyone who thinks investors are always rational should ponder an intriguing new study that shows how a sunny day in New York or an impending holiday can move stock prices.

The research underlines how important states of mind can be to investing. Despite non-stop data crunching and computer gymnastics, the market may not be quite as bloodless or as efficient as many theorists like to assume.

In some ways, this is reassuring, because it demonstrates human beings are still in charge. But it also raises interesting questions about whether we should attempt to embrace predictable psychological swings or do our best to banish them from our individual portfolios.

Consider, for instance, the strange effect of Daylight Saving Time. Moving the clock forward or backward isn’t a big economic event. At worst, it’s a mild annoyance to us. Yet the grumpiness that follows a time shift appears to have a discernible effect on stock prices, according to a working paper by David Hirshleifer of the University of California, Danling Jiang of Stony Brook University and Yuting Meng of the University of South Florida.

Their paper, published this week by the National Bureau of Economic Research, found that some stocks habitually lag behind their counterparts around the time the clock changes. These same stocks also tend to do poorly in September and October, as days grow shorter, and on Mondays, when we’re all depressed at going back to work.

But there is an upside. This group of stocks reverses course and performs unusually well during more upbeat periods, such as in the run-up to a holiday or on days when the sun is shining on New York (and, therefore, Wall Street). The same stocks tend to prosper in January, perhaps as carryover from holiday cheer. They also perform well in March, when spring is in the air, and on Fridays.

This is a rather odd pattern. It’s nearly as if these stocks are moving in line with people’s moods.

In fact, that’s exactly what’s happening, according to the researchers. Traditional finance theory measures the sensitivity of a stock to overall market moves with a measure called beta. The researchers suggest this could be augmented by a measure called “mood beta,” which would measure how sensitive a stock has been in the past to collective shifts in mood, even if that sentiment shift has nothing at all to do with the business news.

To be sure, this sounds rather fanciful. But the researchers backtested a strategy of investing in high mood-beta stocks around reliably happy times, while simultaneously shorting low mood-beta stocks. They then reversed this pattern around more predictably downbeat times, such as September, October or Mondays.

They conclude that this mood-based strategy would have beaten the market. “Assets that outperform in the past seasons when investors are in upbeat moods tend to outperform in future seasons when an upbeat mood is expected,” they write.

This is intriguing stuff. Some enterprising fund manager will probably launch an investment vehicle designed to copy the strategy. But does it make sense for individual investors to get involved with an attempt to mine such market anomalies?

Almost certainly not. Stock market anomalies have a way of disappearing once they’re identified. There’s also the question of whether a market quirk such as this is strong enough to survive all the trading costs and tax expenses that would be involved in exploiting it.

Still, the new research does offer a useful lesson. It shows how all of us are prone to making decisions based on irrelevant inputs, such as whether the sun is shining or the weather is warming up. If such factors can move stock prices, it’s easy to see how other irrelevancies, from politics to news headlines, can also affect our decisions in ways we don’t realize.

The best takeaway for most of us is to mistrust our impulses and stick to a predetermined strategy that removes emotion from the equation. Indexing qualifies. So do various number-based strategies that select stocks according to defined criteria. Both ensure you’re picking stocks rationally – and that would appear to put you one step ahead of many investors.

-- Ian McGugan, Globe Investor

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Stocks to ponder

Canadian Apartment Properties REIT (CAR-UN-T). This stock is overbought, says Scott Barlow. The trust’s unit price jumped 5.1 per cent for the week ending with Thursday’s close, and it’s now the second most technically extended benchmark stock (behind Valeant Pharmaceuticals International Inc.). Read more about overbought and oversold stocks. (for subscribers)

The Rundown

Short-sellers renew bearish bets on marijuana companies

More short-sellers are placing bets that marijuana stocks are headed downward as five cannabis stocks hit the latest short-sellers lists published by The Globe and Mail. The five were: Aphria Inc., Canopy Growth Corp., Cannabis Wheaton Income Corp., Medmen Enterprises Inc. and Delta 9 Cannabis Inc. Short-sellers’ bearish views on the fledgling industry thus appear to have acquired more conviction in recent weeks. Larry MacDonald reports (for subscribers).

In the oil game, play Trump’s Tweets, not the market

Never underestimate the power of a Donald Trump tweet. In late April, when oil was rising fast, taking gasoline prices up with it, Mr. Trump slammed OPEC for prices he deemed “artificially very high.” This week, he took another whack at the cartel: “Oil prices are too high. OPEC is at it again. Not good!” Certainly not good for a President whose Republican party faces mid-term congressional elections in November. Almost every American household owns one or two cars, and an obscene number of them are gas-slurping SUVs. When prices approach US$3 a gallon, American drivers tend to get surly and look for someone to blame. At US$4 – the price reached just ahead of the 2008 financial crisis and subsequent deep recession – they might burn down the White House. Eric Reguly looks at how to play this oil market (for subscribers).

Managing clients’ emotions could be greatest challenge for Canadian financial advisers in 2018: survey

Higher levels of market volatility, interest-rate hikes and possible asset bubbles will threaten investment returns for 2018, but the greatest challenge ahead this year for financial advisers will be managing their client’s emotions. Nearly 60 per cent of Canadian advisers say they do not believe investors are prepared for a market downturn, according to a survey released on Thursday by Natixis Investment Managers. Clare O’Hara reports.

Reasons why your TFSA is a little light on growth

A recent column on benchmarking the growth in your tax-free savings account has generated some bragging and some frustration. An annualized return of 4 per cent was used for a balanced TFSA containing both stocks and bond, with a tilt toward the stocks, while an 8-per-cent return was used for an all-stocks portfolio. Both figures are after fees. Here are some reasons why your performance might have been different. Rob Carrick reports (for subscribers).

Equal amount of women are creating wealth as those inheriting it, survey finds

Female investors are in greater control of their wealth now more than ever as the younger generation experiences a shift in the way women make their money. Half of millennial women reported that they created their own wealth through business, while half said they accumulated it through inheritance, according to a survey released on Tuesday by the Economist Intelligence Unit in partnership with RBC Wealth Management. Clare O’Hara reports.

Top Links (for subscribers)

Trump slaps tariffs on China: Best and worst case scenarios for the global economy

Others (for subscribers)

Friday’s analyst upgrades and downgrades

Friday’s Insider Report: Companies insiders are buying and selling

Others (for everyone)

Canadian dollar near one-year low as trade tensions rise

Oil prices fall sharply as focus moves to prospect of higher supply

International fund managers turn to financials, tech as trade worries rise

Number Crunchers (for subscribers)

Seven stocks for the investor looking for activist-targeted companies offering sustainable dividends

Ask Globe Investor

Question: We set up a registered education savings plan for our grandchildren in 2009 and bought some mutual funds from our bank. Unfortunately, the family moved to the United States and we are unable to make any more contributions. We turned the funds into cash with the idea to move the money to a self-directed RESP to avoid the high mutual fund expenses but it appears that this would entail opening a new RESP, which can’t be done as our grandchildren are no longer residents of Canada. So can we withdraw all the funds and what would the penalties be?

Answer: I asked Mike Holman, author of The RESP Book, to weight in. If the RESP is terminated, “the owner of the account (grandparents) will get all of their original contribution amount back with no penalties,” he said. “However, any grant money in the account will be returned to the government.”

Regarding any income or capital gains that have accumulated in the plan, it’s a bit more complicated. In order for the grandparents to access this money all beneficiaries must have reached 21 years of age and the payment must be made “after the year that includes the ninth anniversary of the RESP,” according to the Canada Revenue Agency website.

If these and other conditions have been satisfied, accumulated income can be withdrawn by one of the subscribers and taxed at his or her marginal rate, plus an additional tax of 20 per cent, Mr. Holman said. The reader did not indicate the ages of the grandchildren, but because the RESP was opened in 2009, the second condition has not been met.

The grandparents could wait until all of the conditions are fulfilled before collapsing the RESP, although - depending on the age of the kids - that could be many years from now. Another option, Mr. Holman said, is to keep the RESP open so that, if the family returns to Canada and the grandchildren attend post-secondary school, they could use the RESP funds - including the grants and income - as intended.

--John Heinzl

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What’s up in the days ahead

Rob Carrick analyzes the performance of the largest 100 mutual funds in the country, and finds out which ones are worth buying. It includes a massive chart looking at all 100 funds.

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Compiled by Gillian Livingston

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