Buying at the beginning of the year
I was asked if the implied investing method that I wrote last time could be pursued as one serious strategy to investing, which is basically to buy at the beginning of the year and let it run for about six months.
Notice that in the analysis I made last week, I traced the price performance of several actively traded stocks based on their prices at the start of the year and six months after. For my analysis, however, the review period was extended up to October.
I looked at the price movements of some stocks in the top 50 price gainers for the first half of 2014—including Max’s Group (MAXS), Double Dragon Properties Corp. (DD), Nickel Asia Corp. (NIKL), Marcventures Holdings (MARC), Trans-Asia Oil and Energy Development Corp. (TA), First Gen Corp. (FGEN), Alsons Consolidated Resources (ACR), D&L Industries (DNL), Philex Mining Corp. (PX) and Island Information & Technology (IS).
The price movements of said stocks within the six-month period ranged from a low of 48 percent, as in the case of PX and IS, to a high of 170 percent as in the case of MAXS.
The price gains made by the other stocks were as follow: NIKL, 117.11 percent; MARC, 76.95 percent; TA, 75.71 percent; FGEN, 66.16 percent; ACR, 64.93 percent and DNL, 56.67 percent.
The prices of some of the stocks reviewed fell in the next four months after June.
Despite this anomaly, people have noticed that buying at the beginning of the year could be a simple and effective investment strategy.
Seasonality
The method is akin to timing one’s entry into the market based on some cyclical considerations based on seasonal tendencies.
While numerous factors affect the direction and movement of markets, it is observed that more often than not, “certain conditions and events recur” at some intervals.
Certain important events also affect the direction and tendencies of stock prices. These include the filing of income tax returns in May.
Such event usually lead to the softening of stock prices as the populace becomes low on or out of extra cash that shares for sale become more preponderant. There usually are more bears (sellers) than bulls (buyers) in the market at this time.
These cyclical conditions and events give rise to seasonal patterns and lead to a slow fall or fast rise of stock prices.
On Wall Street, the closest model that uses this strategy is the Motley Fool “Foolish Four” concept.
The foolish-four approach was said to have originated from the studies popularized by Michael O’Higgins and John Downes in their book, “Beating the Dow.”
The technique is easy and simple. It involves “investing in the 10 Dow Jones Industrials stocks with the highest yield or five with the highest yield and lowest price” at the start of the year. The said stocks were found to have doubled by the end of the year, yielding a 100 percent rate of return.
However, in the study, O’Higgins observed that “the highest Dow stock was often a dog, but the second best-yielding stock often yields as much as 30 percent per year.”
Because of this additional observation, he asserted that “40 percent of one’s capital should be placed to the second best-yielding stock and 20 percent each to third, fourth and fifth highest yielding stocks.”
In a trading system, the cyclical conditions and events would compose what is called the “set-up” or the factors that should be present before taking action.
The first trading day of January serves as the “trigger” or basis of timing for entry into the market.
O’Higgins said the use of the strategy was not confined in January. As he advised, “consider buying on Nov. 1 and selling on the first of May (obviously to follow the adage of ‘Sell in May and Go Away.’)
Bottom line spin
The percentage gains realized by the stocks I reviewed during the six-month period were computed based on their last traded prices on the last day of December 2013 and their last traded prices in end June this year.
Based on the results, the price gains were incredibly big and the prospects of applying the method mechanically—that is, buy in December (or at the start of this year) and sell in June—is tempting.
The market has been on the rise since 2010. Applying the strategy mechanically would have been effectively profitable since then.
Easy and simple as it seems, using it mechanically is actually difficult and dangerous. The uncertainties in the market are just too great and complicated. It takes good judgment and experience to use it effectively like other trading and investing models.
On second thought, our market is still on the roll, and so, why not?
(The writer is a licensed stockbroker of Eagle Equities. You may reach Market Rider at [email protected] , [email protected] or at www.kapitaltek.com)
