The Poor Investor – Investigatory Value Investing

"Faber est suae quisque fortunae" -Appius Claudius Caecus

“Sell in May and Go Away!”

After reading this week’s Barron’s I saw an interesting little chart that showed the growth of $100 if the “sell in May” strategy were followed, also known as the Halloween indicator (original research paper).  Surprisingly, if you had followed a strategy of investing $100 in the S&P 500 since 04/30/45 during October – April periods versus May – September periods, your $100 would have turned into $9329 in the former period versus $99 in the latter.

The chart in Barron’s:

One would think, after seeing this chart, that selling in May, or maybe even April to get ahead of the curve, would be a prudent investment strategy.  However, if you extend the timeline out a bit more you get a picture that looks like this (this chart uses May-Oct. and Nov.-April, however, it is more representative due to the fact that the months are split 50/50, as opposed to 58/42 in the above chart):

Now, you may have noticed that November – April still outperformed.  However, clearly, if you had ignored the period from May – September you would have missed out on some nice gains during this time frame, as a buy-and-hold strategy through all periods worked best.  But what is the difference in periods due to?  If you look at the average returns by month since 1925, you’ll see quite readily:

It seems one of the major culprits is September.  So why not sell in September?

As Ken Fisher points out in his book “Debunkery,” from which this chart was first found, the two worst Septembers (which are notably in the May – October period) were down 29.6% in 1931 and 13.8% in 1937, due to the Great Depression.  All other months, on average, offered gains over the long haul.

What else accounts for the big downtrend in the May – October period:

  • Panic of 1901: May 17, 1901
  • Panic of 1907: October 1907
  • Black Monday: October 19, 1987
  • Friday the 13th mini-crash: October 13, 1989
  • Economic crisis in Asian: 1997 mini-crash: October 27, 1997
  • September 11th attacks: September 11, 2001
  • Internet bubble bursts: October 9, 2002
  • Global Financial Crisis starts: September 16, 2008
  • 2010 Flash Crash: May 6, 2010

To name a few…

Who is to say the next big stock market crashes won’t happen to coincide with April or July, the best performing months on average?

Bottom line: Don’t rely too much on statistical anomalies and try to “time the market” or you might be left holding the bag.

—-Written by: The Poor Investor

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One response to ““Sell in May and Go Away!”

  1. Yasmine Wilson April 17, 2012 at 10:44 am

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