Gentry Wealth June/July 2013 : Page 24

wealth strategies BY ALEX CUSHNER Sell in May and Go Away? W all Street is filled with almost as many bankers as it is with famous sayings. And while today’s bankers may or may not have great insights,the famous sayings do have a lot to teach investors. Even if it is not true, as Benjamin Graham stated, “Wall Street people learn nothing and forget everything,” its proverbs can be helpful. Or, as Sir John Templeton said, “The four most dangerous words in investing are: ‘This time it’s different.’” “Buy when there’s blood in the streets, even if the blood is your own.” —BARON ROTHSCHILD, 1815 Rothschild made his large fortune larger by buying assets during the panic that followed the Battle of Waterloo. Warren Buffett has consis-tently made his large fortune larger, in part by adhering to the philosophy that the best times to invest are historically when the majority of people are afraid to invest. In a 1974 Forbes article, when asked how he felt about the Markets and invest-ing, the normally very staid Buffett said, “[I feel] like an oversexed guy in a whorehouse. Now is the time to invest and get rich.” While the proximate cause varies and could be almost anything that causes people to panic— war, a spike in oil, the bursting of a bubble, a spike in interest rates— history is filled with moments when a majority of people no longer see the future upside of an investment and sell at a great loss, while the minority sees the long term and is able and willing to buy the investment at a great discount. So, if we should buy when others are fearful—or put more elo-quently by Rothschild, if we should “buy on the sound of canons”— how do we know when the sounds of the canons are loud enough? John Maynard Keynes noted,“Markets can remain irrational longer than you can remain solvent.” And since “catching a falling knife” can hurt, and since “dead cats” don’t bounce high enough, we should look to see if any old phrases can help us. Pay attention when they throw the baby out with the bath water Investors have since adapted the statement to illuminate the truth that Markets don’t usually stop going down until they are completely “washed out” or “until they have shot the Generals.” In other words, in the early stages of a Market sell-off, the “worst” stocks usually sell off first, and the end of a Market sell-off usually does not occur until the “best” stocks have sold off. One analytical gauge that investors use to determine a “bottom” is to track the percentage of stocks that are trading below their 50-day moving average. When that percentage is more than 90%, there usually isn’t much more shooting left to do. What about trying to identify potential Market tops, be they for stocks, real estate, gold, or bonds? The story of Joe Kennedy selling all his stock just before the 1929 Crash because the shoeshine boy gave him stock tips may or may not be true, but illustrates a market lesson. “The time of maximum optimism is the best time to sell.” —SIR JOHN TEMPLETON —DERIVATION OF A 16TH-CENTURY GERMAN PROVERB The point of these quotations is relatively clear and even the newest, most causal investor could probably state a version or two of the above state-ments. Yet, from “tulip mania” to the South Sea bubble; from the “Nifty Fifty”to the Internet bub-ble; from the housing bubble to, potentially, the bond bubble (investors added $1.1 trillion in bond funds since March 2009 according to Investment Company Institute), most investors simply can’t seem to help themselves from jumping into what-ever market is the hottest at the time. According to the Stock Trader’ s Almanac , since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Whether or not this seasonal factor will play out again in 2013 remains to be seen, but it is certainly worth contemplating the wisdom of this strategy. Then again, if we are going to put a lot of faith in trends, there are endless options: the lunar calendar; the so-called “mini skirt indicator” (skirts seem pretty short, which is supposedly good for stocks); the Super Bowl indicator (the Ravens win was apparently a bad omen); the “as goes January, so goes the year” theory; and/or the Presidential cycle. One or all of these could either undermine seasonal factors or enhance them. Suffice it to say, there are lots of indicators that attempt to show us when to buy and when to sell. But perhaps Warren Buffett has it right when he says, “Our favorite holding period is forever.” Investing is incredibly hard, and success involves about equal parts of art, science, and patience. And since “a fool and his money are easily parted,” we should eagerly learn the lessons of the past to help us invest our money today. N Alex Cushner is a Managing Director and Financial Advisor at Robert W. Baird & Co.’s San Francisco Private Wealth Management office. He has over 20 years of financial services experience. acushner@rwbaird.com GW x 24

Wealth Strategies

Alex Cushner

Sell in May and Go Away?

Wall Street is filled with almost as many bankers as it is with famous sayings. And while today’s bankers may or may not have great insights, the famous sayings do have a lot to teach investors. Even if it is not true, as Benjamin Graham stated, “Wall Street people learn nothing and forget everything,” its proverbs can be helpful. Or, as Sir John Templeton said, “The four most dangerous words in investing are: ‘This time it’s different.’”

“Buy when there’s blood in the streets, even if the blood is your own.” —BARON ROTHSCHILD, 1815

Rothschild made his large fortune larger by buying assets during the panic that followed the Battle of Waterloo. Warren Buffett has consistently made his large fortune larger, in part by adhering to the philosophy that the best times to invest are historically when the majority of people are afraid to invest. In a 1974 Forbes article, when asked how he felt about the Markets and investing, the normally very staid Buffett said, “[I feel] like an oversexed guy in a whorehouse. Now is the time to invest and get rich.”

While the proximate cause varies and could be almost anything that causes people to panic— war, a spike in oil, the bursting of a bubble, a spike in interest rates— history is filled with moments when a majority of people no longer see the future upside of an investment and sell at a great loss, while the minority sees the long term and is able and willing to buy the investment at a great discount.

So, if we should buy when others are fearful—or put more eloquently by Rothschild, if we should “buy on the sound of canons”— how do we know when the sounds of the canons are loud enough? John Maynard Keynes noted, “Markets can remain irrational longer than you can remain solvent.” And since “catching a falling knife” can hurt, and since “dead cats” don’t bounce high enough, we should look to see if any old phrases can help us.

Pay attention when they throw the baby out with the bath water

—DERIVATION OF A 16TH-CENTURY GERMAN PROVERB

Investors have since adapted the statement to illuminate the truth that Markets don’t usually stop going down until they are completely “washed out” or “until they have shot the Generals.” In other words, in the early stages of a Market sell-off, the “worst” stocks usually sell off first, and the end of a Market sell-off usually does not occur until the “best” stocks have sold off. One analytical gauge that investors use to determine a “bottom” is to track the percentage of stocks that are trading below their 50-day moving average. When that percentage is more than 90%, there usually isn’t much more shooting left to do.

What about trying to identify potential Market tops, be they for stocks, real estate, gold, or bonds? The story of Joe Kennedy selling all his stock just before the 1929 Crash because the shoeshine boy gave him stock tips may or may not be true, but illustrates a market lesson.

“The time of maximum optimism is the best time to sell.” —SIR JOHN TEMPLETON

The point of these quotations is relatively clear and even the newest, most causal investor could probably state a version or two of the above statements. Yet, from “tulip mania” to the South Sea bubble; from the “Nifty Fifty” to the Internet bubble; from the housing bubble to, potentially, the bond bubble (investors added $1.1 trillion in bond funds since March 2009 according to Investment Company Institute), most investors simply can’t seem to help themselves from jumping into whatever market is the hottest at the time.

According to the Stock Trader’s Almanac, since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Whether or not this seasonal factor will play out again in 2013 remains to be seen, but it is certainly worth contemplating the wisdom of this strategy. Then again, if we are going to put a lot of faith in trends, there are endless options: the lunar calendar; the so-called “mini skirt indicator” (skirts seem pretty short, which is supposedly good for stocks); the Super Bowl indicator (the Ravens win was apparently a bad omen); the “as goes January, so goes the year” theory; and/or the Presidential cycle. One or all of these could either undermine seasonal factors or enhance them.

Suffice it to say, there are lots of indicators that attempt to show us when to buy and when to sell. But perhaps Warren Buffett has it right when he says, “Our favorite holding period is forever.”

Investing is incredibly hard, and success involves about equal parts of art, science, and patience. And since “a fool and his money are easily parted,” we should eagerly learn the lessons of the past to help us invest our money today.

Alex Cushner is a Managing Director and Financial Advisor at Robert W. Baird & Co.’s San Francisco Private Wealth Management office. He has over 20 years of financial services experience. acushner@rwbaird.com

Read the full article at http://mydigimag.rrd.com/article/Wealth+Strategies/1410237/160555/article.html.

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