{"id":50402,"date":"2014-05-01T20:34:57","date_gmt":"2014-05-02T00:34:57","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=50402"},"modified":"2014-05-01T20:34:57","modified_gmt":"2014-05-02T00:34:57","slug":"how-to-avoid-getting-fleeced-by-this-dangerous-stock-market-myth","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2014\/05\/01\/how-to-avoid-getting-fleeced-by-this-dangerous-stock-market-myth\/","title":{"rendered":"How to Avoid Getting Fleeced by This Dangerous Stock Market Myth"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a><\/p>\n

I don’t buy into superstitions.<\/p>\n

I have no problem with Friday the 13th. You won’t find a rabbit’s foot hanging from my computer screen. My family even owned a black cat when I was a kid.<\/p>\n

I just don’t see any supernatural forces at work there.<\/p>\n

I think it goes back to my university training in physics.<\/p>\n

As a physicist, I was trained to rigorously apply the scientific method. That means I let reality speak for itself.<\/p>\n

You support a theory when reality confirms its predictions…but when those predictions prove to be wrong, you tear that theory down.<\/p>\n

That’s not only the secret to success in experimental physics. It’s also a solid basis for investing.<\/p>\n

But investors are only human. We’re hardwired to look for patterns, even when none exist. <\/p>\n

Especially at this time of year, you might have fallen into the trap of trading superstitiously. <\/p>\n

Here’s my advice about how to avoid that trap…<\/p>\n

‘Sell in May and go away,<\/em>’ is one of the stock market’s<\/strong><\/a> great persisting superstitions.<\/p>\n

Some punters believe this saying is steeped in logic because it comes with a colourful old story. Here’s where it comes from.<\/p>\n

Once upon a time, it’s said that the entire London financial district enjoyed a leisurely European summer. They were more focused on sporting events than their clients’ portfolios. <\/p>\n

That meant there were fewer people buying and selling shares<\/a>. That means higher levels of volatility. And with the buyers on holiday, it’s said that gravity would pull the stock market down over the warmer months.<\/p>\n

This situation would last until the end of the northern summer in September. <\/p>\n

To be precise, the second half of the saying is ‘come back on St Leger’s Day<\/em>.’ The St Leger Stakes is the oldest of England’s five horseracing classics and is the last to be run.<\/p>\n

With the suntanned stockbrokers back in their offices, stocks would resume a smoother upwards ride each year in September.<\/p>\n

Or so the story goes.<\/p>\n

Look, I can vouch for the fact that the European trading floors go quiet over summer. When I sold US equities in London, on some summer days you could almost hear a pin drop.<\/p>\n

But the facts simply don’t support this idea that stocks always go down in May. <\/p>\n

\n

Don’t buy or sell blindly<\/strong><\/h2>\n<\/p>\n

‘Sell in May’ advocates usually point to the last few years as evidence that their theory is valid.<\/p>\n

And to be fair, in May of each year from 2010 to 2013, Australia’s benchmark S&P\/ASX 200<\/a> index fell by -7.86%, -2.38%, -7.29% and -5.10%.<\/p>\n

A blindly superstitious May seller would feel vindicated.<\/p>\n

But I don’t buy or sell blindly. <\/p>\n

I’m either in the market or out of it, based on the underlying fundamentals.<\/p>\n

And there’s a fundamental reason for each shaky May in the past four years. <\/p>\n

May 2010, if you remember, brought the ‘flash crash’ and a deeply unpredictable Greek debt crisis.<\/p>\n

2011 saw a relatively benign May, but the European debt situation was still stressing out global investors that month.<\/p>\n

May 2012 saw a sharp sell-off of emerging markets<\/a> as political upheaval threatened the Greek bailout. On top of that, the Spanish conglomerate Bankia sought its own rescue.<\/p>\n

And last May, then US Federal Reserve chairman Ben Bernanke dropped his first hints that the Fed was thinking about slowing down its money printing presses.<\/p>\n

But hey, let’s extend the retrospect by an extra year. If you’d chosen to sit out the six months from May 2009, you would have cost yourself almost 30% upside in the Australian, US and European stock markets<\/a>. That was a huge result for large-cap stocks.<\/p>\n

Here’s my point: when markets go up or down, there’s generally a fundamental reason that underpins the move. <\/p>\n

\n

Don’t bank on a coin flip<\/strong><\/h2>\n<\/p>\n

Stock markets are massively more sophisticated now than they were 100, 50 or even 20 years ago.<\/p>\n

The days of lazy brokers nicking off to the polo and constraining the progress of an entire market are long gone.<\/p>\n

So the colourful old story I told you earlier clearly has no basis as a reliable investment strategy<\/a>.
\n There have been many, many years when “sell in May” hasn’t worked out.<\/p>\n

And looking back over a 30-year period, it becomes a real flip of the coin. You can’t bank on that.<\/p>\n

The statistics just don’t present a strong enough case for it.<\/p>\n

I’m not trying to tell you that stocks always go up. I’m just saying there’s no room for emotion or superstition in the stock market. <\/p>\n

When smarter investors catch wind of irrational behaviour, they exploit it ruthlessly. Don’t get sucked in.<\/p>\n

\n

Advice to profit<\/strong><\/h2>\n<\/p>\n

Here’s a strategy that outperforms ‘sell in May’, ‘buy before Halloween’ or any number of other bogus investment schemes.<\/p>\n

Are you ready for it?<\/p>\n

Here it is: buy stocks when they look undervalued relative to their potential. Then hold them long-term.<\/p>\n

Yes, stocks have enjoyed a good rally over the past nine months. But you can still capture plenty of upside by investing in certain carefully selected companies.<\/p>\n

Sometimes a stock’s story can take a while to play out. To benefit from the capital appreciation when catalysts ignite, you have to be in the market.<\/p>\n

And market catalysts, be they macroeconomic or stock-specific, don’t wait for a calendar date.<\/p>\n

Here’s the valuable point that punters who ‘sell in May’ ignore.<\/p>\n

When you own dividend-paying stocks<\/a>, you get paid to stay in the market and wait for those catalysts.<\/p>\n

Dividends are an important component of total stock returns, especially here in Australia.<\/p>\n

That’s even the case for some small-cap stocks<\/a>. <\/p>\n

Not every small-cap pays a dividend. But when they do, I look for companies that have a real prospect of raising that dividend, and also scream ‘buy me’ on a valuation basis.<\/p>\n

I call those stocks ‘Turbo Caps’. <\/p>\n

And there’s a few belters in that group among the exciting speculations on the Australian Small-Cap Investigator<\/em> buy list.<\/p>\n

If you want to generate real wealth through the stock market, you can’t get there by following kooky sayings and folk tales.<\/p>\n

You get there by buying stocks for less than they’re worth…and holding them for the long term. <\/p>\n

Cheers,
\n Tim Dohrmann+<\/a>
\n Small-Cap Analyst, Australian Small-Cap Investigator<\/em><\/strong><\/p>\n

From the Archives…<\/em><\/strong><\/p>\n

Investing in Technology — the Cheat’s Guide<\/a>
\n26-04-14 – Shae Smith<\/p>\n

Join Money Morning on Google+ <\/u><\/a><\/strong><\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nBy MoneyMorning.com.au<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au I don’t buy into superstitions. I have no problem with Friday the 13th. You won’t find a rabbit’s foot hanging from my computer screen. My family even owned a black cat when I was a kid. I just don’t see any supernatural forces at work there. I think it goes back to my … <\/p>\n

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