Serious Money: The old market cliché tells us that we should sell in May and go away until St Ledger's Day, but how reliable is this advice? Perhaps a better question would be where did it originate?
Analysts might be forgiven for thinking that it is rooted in some thorough statistically based piece of research. Maybe it is, although I have never been able to identify such a piece of work.
Cynics suggest that the English sporting and social calendar has always been behind an idea that essentially advises investors to take the summer off. St Ledger's Day usually falls early in September and is marked by a horse race. Between then and May, most brokers and fund managers have to cope with the distractions of test cricket, Royal Ascot, Wimbledon and a whole host of other sports and social activities that require dressing up like an extra in Brideshead Revisited.
Regular readers of Serious Money will know that we take all claims of exploitable market anomalies with a pinch of salt. The bulk of the available statistical evidence suggests that January effects, Monday effects, small-cap stock effects and sun-spot effects are either bogus or, if they have existed in the past, disappear (or even reverse) when we try to bet on them. But the sell in May idea always refuses to die, so a look at the evidence is in order.
One of the most well-known studies, produced by a couple of academic types called Bouman and Jacobsen, suggests that the sell in May effect is, in fact, real. These guys have claimed that an investor who exploits the May-September trading anomaly can halve the risk from investing in equities (presumably by selling out - or lightening up - just before May and getting back in at the end of August). The rule works in 36 out of 37 countries and is, apparently, strongest in the UK.
One of the iron rules of statistical studies is that, just when you thought you have read about something interesting, some other academic will come along to rubbish the earlier findings and cast doubt on our ability to make any money from them. Sure enough, the Bouman and Jacobsen research has been knocked by other academics, sufficient for us to dissuade anyone who is tempted to bet the farm on a big equity short position.
Recent evidence, for the UK at least, is against the cliché's prediction: over the past 10 years, it has been right to buy shares in May on six occasions. But 10 years is too short for proper analysis and, if we go back far enough, we find that May and June are, on average, the two worst months of the year over much of the past century. May is also close to being the worst-performing month for the Dow Jones. For US equities, April is usually the kindest month; given the poor April that we have just had, many traders who follow these kinds of patterns are keeping their fingers crossed.
Each year is different and sometimes it will be wise to avoid the summer months. For my money, this year is shaping up to be a replica of 2004, when the May-September period was characterised by worries over global growth and stock markets were, at best, sluggish. Similar concerns are holding equities back right now and it may take several months for them to be assuaged. Indeed, our friends the super bears are making an unseasonal appearance and arguing that the world is about to end, led by an implosion in consumer spending in the English-speaking world.
Warren Buffett's annual letter to Berkshire Hathaway shareholders has reached iconic status; within it is always contained enough investing wisdom to make most people decent money. This year's letter is no exception and contains a memorable phrase that anyone concerned about all the current doom and gloom in stock markets would do well to remember. Buffett urges anyone to resist the temptation to be obsessed with the timing of their investments: not even the great man himself gets this bit right. But, says Buffett, if timing is your thing, remember to be fearful when others are greedy and greedy only when others are fearful. In other words, buy when everyone else is in a state of panic or, at the very least, suffering from depression of one kind or another.
Incidentally, Buffett's letter provides a deceptively simple and concise explanation for why many investors achieve lousy performance from their forays into stock markets. First, high costs - because of overtrading or too much spent on management fees. Second, portfolio decisions based on tips and fads rather than thoughtful, quantitative analysis. Third, playing the market timing game - almost always guaranteed to lose you money. All of Buffett's letters are contained on the Berkshire Hathaway website and should be regarded as required reading for any serious investor.
If 2005 is to be a repeat of last year, there is no rush to get back into stocks. Anyone who thinks the world is not about to end and that economic growth will continue, albeit with all the ups and downs that go with the cycle, should steel themselves for a bout of market nerves. High oil prices and worries over some other old acquaintances, the US twin deficits, are taking their toll on market sentiment. But, as another old cliché has it, if recent market weakness portends a significant drop in markets over the summer months, we will have been visited by our old friend the buying opportunity.
Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.
