Caroline Ritchie: Seasons come into play for shares

Caroline Ritchie,

CLOUDS of pollen hang in a fool's thin air. It is another contemplative spring. Those particles behave this way every year, along with the equinox gales which bother the orchardists and roofing contractors. Both always seem to take people by surprise. After centuries of the same weather, we keep wondering if it will be different this time around.

Conversely, we just love sticking seasonal expectations onto sharemarkets. Sell in May and Go Away. The Halloween Indicator. Window Dressing. Christmas Tax Loss Harvesting Effect. The festive season in US fund management means frantically switching losing bets in between martini lunches. In New Zealand it is more about taking the odd bloke for a steak dinner with his own money and talking barbecue recipes.

Still, seasonal bias exists for a reason. "Sell in May"is a fun one, because studies show that it might work. Bauman and Jacobsen (2002), got a strong correlation of longer term higher returns by buying in November and selling in April rather than holding year round. The pattern showed across nearly all the major northern hemisphere markets.

Why then is your local adviser not gearing you up for this annual bonanza? With only days to go until November and a pleasing rally this week in which to sell into, where is your neat company logo newsletter saying "Gidday Jim, it's that time again!"

Two big reasons. Fees and research notes. Fees are pretty straightforward. If you have a client paying you to manage his money, you are unlikely to wave him off into the twilight and not collect for six months out of every 12. Retail money management empires are not built by part-timing the fee structure.

Research notes run deeper. All the big, established portfolio investment businesses in New Zealand spend heavily on research departments. These teams are employed to value the major companies that are listed on our sharemarket. Their job is to measure the finances and fortunes of these companies and weigh it all up. The result of their work is a number that the analyst considers to be the "fair value"or "intrinsic value"of the company. In theory, if you know this, you can see whether the trading price is cheap or expensive compared to it, and buy or sell. This number is used by advisers to make investment recommendations to clients, and without which a large chunk of their trade would not exist. I cannot underline strongly enough the current power of the research note in the advisory business.

You have to believe in efficient markets of course, because if the stock prices do not play ball, the research note is just all paper promise and no investment trousers. You would be amazed at how many of these actually end up on the market rubbish heap, given the millions of dollars thrown at this stuff.

The problem for the analysts is that markets are not efficient. However, the notes are based on this being so, (called the efficient market hypothesis), and investment firms cling religiously to it simply because a better method has not been invented yet.

Now, selling in May and going away is definitely not efficient. It suggests that humans are emotionally fallible and something happens to them when the weather gets warmer, specifically that their investing talents get worse. So, although it might be a profitable strategy, you would have to completely abandon your efficient market thoughts to believe in it. The analysts are not allowed to do this and so, ladies and gentlemen, that is why you should not expect to find such "voodoo", no matter how effective, being pumped into your quarterly report this month.
Or ever. But hey, at least the sun is shining.
Caroline Ritchie is a former AFA, sharebroker & portfolio manager. She runs Investment Stuff, an investment coaching service. Visit her at www.investmentstuff.co.nz. Statements in this column are not financial advice.