We recently published "A Conversation with Gerry Frigon" in which longtime portfolio manager Gerry Frigon made the observation that Wall Street, reinforced by the twenty-four hour financial media cycle, has cultivated the image of knowing better, of being able to time this trend or that trend.
"Built into the system," he said, "is a sense of inadequacy in the investor," which serves to make the average person feel dependent upon the professionals, who "reinforce the delusion that they know something that someone else doesn't."
One old Wall Street expression that the financial media trots out every spring is the dictum, "Sell in May and go away," which supposedly describes the behavior of the "big Wall Street traders" and other "players" who know more than you, the poor outsider hungry for a few crumbs of smart money knowledge.
Every year in May, studies appear which analyze the average performance of the equity markets in the summer and fall months of June through October, versus their performance in the other months of the year.
Even if these studies actually turn up some seasonal patterns in stock market behavior, it does not stand to reason that investors should actually build their own investment strategy on an attempt to time these cycles.
For one thing, just because a majority of those months throughout history have been negative, or less positive than other months of the year, this fact has virtually no bearing on what those months will look like this year. This year, for example, the broad equity market as measured by the S&P 500 index rose 0.20% in June, 7.14% in July, and 1.99% in August through August 10, even with the pullback of the past few days.
Investors who sold anytime during May would have missed all that investment growth (possibly more, if they owned companies that performed better than the broad market).
Furthermore, depending on when in May they sold, they missed some gains in that month as well -- the S&P 500 index went up 5.31% in May of 2009 as well. The chart above depicts the axiom-defying movement of the index so far this year (with dotted lines showing the performance above its level at the end of May and also the beginning of May).
The bigger issue, however, is that investors should free themselves from the illusion that some Wall Street insiders or their acolytes in the financial industry can successfully forecast the upcoming moves of the market (or of this or that sector, commodity, currency, or bond yield).
While few modern investors may fall for the reliability of "sell in May and go away," they nevertheless yield to other manifestations of this sense of inferiority and dependence upon the prognostications of a class of financial tea-leaf readers. This shows the continuing truth of an observation made in 1929 by Harvard Business School Professor Harry W. Dunn, who called this problem "the persistent delusion" -- "that coming moves of the stock market can be successfully guessed, bringing greater rewards to those relying on that procedure than are obtainable through the adoption of any other policy."
Let the adage "Sell in May and go away" become a reminder to investors to break free from such investing traps.
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For later posts dealing with this same subject, see also:
- "Market-timing and train-timing" 05/25/2010.
- "Does a rising tide really lift all boats?" 07/20/2010.
- "Investors fleeing equity funds for bond funds" 08/25/2010.
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