Sweet November... well, not really: The war lingers on for purposes unknown to most and oil prices continue to rise. Credit woes dominate the financial headlines, and value stocks seem intent on extending their correction into a seventh month. Investors want a stronger dollar while lower interest rates (and lower taxes) are clearly more beneficial. Neither political party has a candidate that supports real tax reform for both investors and corporate job creators, nor has the counter productive United States Regulation Industry stopped growing faster than most world economies. In terms of issue breadth alone, November is becoming the worst month (or the best buying opportunity) since July of 2002, and possibly since October of 1987. Just who makes this good/bad determination anyway, the Wall Street institutions, the media, investment letter writers? Why are rallies considered good and corrections bad? Will we remember 2007 as the year of the Grinch or will the leaves and the market stop falling in favor of a Santa Clause rally? Only the phantom knows for sure.
Every fall, good year in the market or not, I remind my clients that the final calendar quarter is a very special time. November is particularly exciting because it hosts the convergence of four Katrina-level forces, all of which are part of Wall Street's conventional wisdom while none of them lead to intelligent investment decision making. And this year we have a special treat in the form of a Category Three market correction in the Value Stock sector. (October '87 was a Short Five; June '98 through January '00 was a long Four.) A five-force November Syndrome can be particularly destructive; no wonder the media is giving it so much attention... carnage at last!
Force One is the mad rush of the lemmings to realize losses on equity and/or income securities for absolutely no investment reason at all... just because they have fallen in price from the time that they were purchased. Assuming (as I always do) that we are dealing with "Investment Grade Securities", lower prices should more logically be seen as an opportunity to add to positions cheaply than as an opportunity to reduce the 2007 tax liability on our other investment earnings. Losing (your) money is only a good idea in the eyes of accountants, particularly if the reasoning for buying the security was sound in the first place, and assuming that the issuing company is still profitable. This "tax-loss" lunacy is comparable to barging into your boss' office and demanding a cut in pay, and it could be eliminated entirely by some intelligent tax reform. Have hope investors, I've heard a rumor that candidate Romney is talking about eliminating taxes on investment earnings.
Similarly, letting your profits run, as instructed by Force Two, in order to push the awful things into 2008 is just foolishness. Talk to those geniuses who didn't take profits in 1999 (or in August, '87) and who are still waiting for their stocks or Mutual Funds to bounce back! The objective of the equity investment exercise is to take profits... the more quickly and more frequently, the better. There are no guarantees that the profits will wait for you to pull the trigger at your personal tax convenience. And patting yourself on the back when you have unrealized gains within your income portfolio is equally absurd. What's better, a 10% profit in your hand today, or 6% over the course of the next twelve months? Profits need to be taken when they appear... the investment gods are watching.
Force Three takes the form of a trade, and is innocently called a Bond Swap... one of two reasons why your broker sold you those short-duration, odd lot positions in the first place. Now he has the opportunity to pick your pocket by exchanging them at a "nice tax loss" for another bond with "about the same yield". He gets a double dip commission (yeah, I know it's not on the confirmation notice, but a mark-up is applied to each side of the trade), and you get a bond either of longer duration or lower quality. Somehow it's OK now to buy the longer duration bond. Really, this is how they finance their Christmas Shopping! If you don't fall for the swap con, he won't be too upset... the rapid turnover of your portfolio nets him a cool 3% on each maturing issue anyway.
As if all of this isn't enough, Wall Street gangs up on you some more with a self-serving strategy that is blithely referred to by the Media as Institutional Year End Window Dressing...a euphemism for consumer fraud. In this annual Shell Game, Mutual Fund and other Institutional Money Managers unload stocks that have been weak and load up on those that are at their highest prices of the year. Always keep in mind: (a) that Wall Street has no respect for your intelligence and (b) that the media talking heads are entertainers, not investors. Institutions must show how smart they are by having quarterly and annual reports that reflect their unfailing brilliance, so they boldly sell low and buy high with your retirement nest egg.
It would be an understatement to say that the sum of these year-end strategies typically adds to the weakness of the weak and "proves" the intelligence of buying the strong. The November Syndrome is a short-lived annual investment opportunity that most people are too confused to notice, much less appreciate. Simply put, get out there and buy the November lows and wait for the periodic and mysterious January Effect to happen. The media will talk about this phenomenon with wide-eyed amazement as they watch many of the horrid become torrid for, seemingly, no reason at all. What's happening, you might ask? Well, those professional window dressers are now selling their high priced honeys and replacing them with the solid companies they just sold for losses. Interesting place, Wall Street... tough but manageable. Take the profits and pay the dreaded taxes. Buy the November lows, even add to existing holdings. More often than not, this proves to be a winning strategy if you stick with investment grade securities.
Note: The 2nd Edition of "Brainwashing" has arrived.
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"