A Danish poet wrote a poem many years ago saying that the year contains sixteen months and five of those are November! A not so subtle hint that darkness and cloudy weather is becoming the norm at this time of year and that time tends to become more of a drag.
My mother and I are less pessimistic. In fact it is a month where we indulge in our disorders and celebrate them. For her Christmas comes early. And those 107 Santa Claus characters populating every shelf in the house? Well, they are just not enough. And so as soon as the stores make new ones available she acts swiftly and decisively. With skills carefully crafted and perfected over many years she picks out the most spectacular ones before anyone else can get to them – and thus fulfills her cravings.
I’m also like that at this time of year except my disorder is more related to stock purchases. I load up on stocks I have had my eyes set on and I even buy on margin (4% currently and I will most likely boost it to 10% as I have done in previous years). Doing so makes me tense but I simply refuse to let those crumbs lie on the floor without picking them up when they are thrown around so carelessly by money managers clinging on to their jobs. You might say I have a mean streak in me because I don’t believe in leaving money on the table for my fellow man but when I see mispricings before my eyes without acting on them, I become physically ill. The stomach ache from buying on margin I can handle but not that other pain. Also, stomach ache is the constant companion of the bargain hunter so I get a bit of extra practise at the same time!
So what makes some money managers become so generous all of a sudden? Why do they act like amateurs and let small investors eat their lunch?
Some investment funds mislead their clients by selling badly performing securities before the end of a reporting period – month, quarter or year – and use the money to buy a rising security instead or to hold cash to buy back the securities they sold when the new period begins. By listing the stocks they hold at the end of the period the fund wants to appear to have performed better than it actually has. It is a despicable practise but it is a well-known fact within the industry that it occurs and it is most prevalent during the months of November and December.
Here is another window dressing technique that I witnessed in real time as I had an interest in buying a related stock at the time: Check out Wilhelmsen Holding’s A stock movement, ticker WWI, on October 30th, the last day of the month. In the last half hour of trading that day the price jumped 10% from 154 to 170,5 on low volume ochestrated by one buyer, CSB, who had been buying heavily in the previous weeks. The related B share hardly moved and in the following days the price came down by the same amount. This maneuvre is not legal but nonetheless it can often be witnessed in several illiquid stocks, especially on Dec 31st. The purpose is to inflate performance numbers at a relatively small price. It seems silly and if you or I did that it would be akin to pissing in our pants to keep warm for a few seconds. But perhaps you would also be tempted by sub par investment decisions if you had clients or bosses to report to?
In an overall rising year selling losing stocks to cancel out part of the wins can lessen the tax burden. For this reason you will often see stocks that have underperformed reach their lows in November/early December.
Be on the other side of the trade
You could call both of the above light forms of ”forced selling”. Any time you can be on the other side of a trade that isn’t driven by company fundamentals you want to be in that position – supposing of course that you want to own the particular stock in the first place. Note that what I am talking about here is the general odds of the above happening – you never know with absolute certainty who you buy from or what their motives are.
The January effect and small cap losers
Part of the reason January is often particularly good to small cap stocks that performed badly the year before can be attributed to the above practises. The market tends to correct itself and smooth out ineffeciencies but strangely this one has persisted and I will continue the uncomfortable practise of buying on margin for three months of the year and then gradually become non-leveraged come February/March until evidence says the market has erradicated it.
This bet doesn’t always turn out favorably, of course. In fact as late as 2014 I was not treated with any respect whatsoever by Mr. Market when I went for a leveraged oil play that turned sour as the oil price decline worsened. I won’t know for sure whether my bet was sound but I believe it was and therefore I would do it again. Investing is at heart a mathmatical undertaking where you attempt to estimate the likelihood of different scenarios happening:
Expected value = (Intrinsic value of the company in Scenario A * likelihood percentage) + (Scenario B * likelihood) + (Scenario C * likelihood) etc…
Dance like a butterfly sting like a bee
The above is a quote by Muhammad Ali to describe his boxing style: Non-dogmatic and opportunistic. When you see an opening: Pounce. I think this flexible attitude can also be applied by the enterprising investor even though check lists and hard rules are also a fine way to guard oneself against permanent loss. But to completely shut oneself off from action when circumstances are especially favorable is also a mistake in my book – mistakes can also be ones of omission as Charlie Munger puts it.
There is only principle I will not bend ever and that is the idea of a large Margin of Safety. The gap between what I perceive the value to be and the market price needs to be large for me to consider an investment no matter the circumstances.