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The author has been investing his entire life. Before he was born, his parents took the four shares of AT&T stock they received for attending a life insurance pitch and put it in his name. So, for the moment he was born, the author was an investor. When the author is not wasting time at... More
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  • Sell in May and Go Away Bad Investing Advice
    There's an old saying that's been passed down over the years.  It's "sell in May and go away."  That comes from the days where wealthy investors would sell their stocks in the month of May and go on vacation to their summer homes, where they weren't able to trade.  Obviously, those days are long gone, with an internet connection all anyone needs to trade.  But the saying has persisted despite this.

    The Financial Times did an analysis and found that between 1920 and 1970, there was some truth to the saying.  Between November and April, stocks rose 65 percent of the time.  During the period between May and October, they increased 58 percent of the time.  While the difference is statistically significant, investors could not capitalize on it.  Trading costs were too high and the difference was too small.  And the spread was too close to 50/50 for anyone to take advantage of it in any given year.

    During the last two decades of the last century, however -- as it became possible for investors to take advantage of the trend due to lower trading costs -- following the advice was very profitable.  In the November through April period, stocks rose 95 percent of the time, with an average gain of 12.5 percent.  Contrast that to the return of 1.5 percent during the May through October period during the 1980s and 1990s.  Gains were only seen half the time, and that was during one of the best bull markets ever.

    When the calendar flipped to the 21st century, that trend vanished.  The so called "bad" months of May through October have seen gains 70 percent of the time, while the so called "good" months have seen gains 60 percent of the time.  According to Standard & Poors, the S&P 500 has gained an average of 2.5 percent between May and October since 1933.  That may not scream "buy," but it certainly doesn't scream "sell" either.  May has actually been the second strongest month over the past ten years, as you can see from the chart.  There's only ten data points to evaluate, but it's enough to show that the trend we saw in the last two decades of the 20th century seems to have turned.

    So the "sell in May and go away" adage doesn't appear to be good advice.  But it can be used by investors to benefit them.

    It just needs to be interpreted in a different way.  Instead of selling all of your stocks in the month of May and going away on an extended vacation, what investors should do is sell stocks that no longer work for them and making them go away.  We recently wrote about how we dumped Kraft Foods and its CEO who delivered what the board called "exceptional" results that lagged the S&P 500 by a wide margin.  Investors should look at their portfolio and see what laggards they're carrying.  If they decide that they don't like the potential of those laggards, then they should sell those in May and make those stocks go away.

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    May 06 2:06 AM | Link | Comment!
  • Innovation and Stock Returns
    Image representing HTC as depicted in CrunchBase

    Image via CrunchBase

    Investors are always looking for companies that have an edge on their competition.  One way that companies gain and keep an edge is through innovation.  This can be through technology, service, training, or a host of other factors.

    Businessweek recently released its list of the 50 most innovative companies.  This list, which was put together by the Boston Consulting Group, which surveyed executives and came up with a list of top innovators.  For the first time, companies outside the United States comprised the majority of the list.  One perfect example of this is HTC, which was once just a contract manufacturer of phones.  HTC decided that instead of just making phones, it would design them as well.  The result was a jump onto the list of most innovative companies, with HTC climbing into the 47th spot.

    In order to determine whether innovative companies have a competitive edge -- which would seem logical -- we compared the one year, three year, and five year stock returns to the Dow Jones Industrial Average, the S&P 500, and the Nasdaq.  We took the returns for each American company and averaged those, so that we'd reduce the effect of outliers.  Why American companies?  That's a good question, and we did this because we wanted to have a clean comparison.  We didn't want to have to compare companies based overseas to American indices.

    The result?  Companies in the 50 most innovative companies outperformed the Dow, S&P 500, and Nasdaq by significant margins.  The average one year return for these companies was 56 percent, compared to 46 percent for the S&P 500, 45 percent for the Dow, and 54 percent for the Nasdaq.  Over the past three years, the average return for the top 50 innovators was eight percent.  That may not sound like much, but the S&P 500 declined by five percent; the Dow was off by two percent; and the Nasdaq gained four percent over the past three years.  And over the past five years, the innovators gained 12 percent.  That's quadruple the S&P 500's gain of three percent; three times the Dow's return of four percent, and significantly higher than the Nasdaq's eight percent.

    It's pretty clear that investing in innovative companies can be good for your portfolio.  But other factors need to be taken into consideration, because buying an innovative company but paying too much for it isn't a good investment strategy  For example, Apple, which topped the list of the most innovative companies, is trading at a very rich 30 times earnings.  In order to maintain that premium valuation, it's going to have to continue to deliver big earnings growth, which is something that's difficult for even the best companies to do.  Thus, while it is an innovative company and a very strong one, its shares may be overpriced.

    On the other hand, Ford, even with a big runup, is trading at 17 times earnings, which is below the S&P 500's 20 times earnings.  It's a lot easier to deliver earnings growth that justifies a 17 multiple than it is to deliver earnings that justify a 30 multiple.  Thus, for investors who don't want to pay too much for a company -- even a great one like Apple -- Ford may be a better investment.

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    Disclosure: Long F
    Tags: F, AAPL
    Apr 23 11:47 AM | Link | Comment!
  • Nervous Markets Get Lots of Data This Week
    As you know, over the past few days, the markets have plunged on concerns that the Obama administrations proposed restrictions on banks owning hedge funds and private equity firms and proprietary trading.  Adding to the downward pressure was China announcing that it was tightening lending to prevent a bubble from forming.  Bad news about Greek debt and concerns over the ability for other countries in Europe to meet their obligations made things worse.

    Image via Wikipedia

    All this added up to a week where stocks sold off, with the Dow, S&P 500, and Nasdaq all off by around four percent.

    There is a lot of nervousness among traders these days.  How else could you explain a sell off in Intel's stock despite their beat on earnings, revenue, and margins?  Bans on proprietary trading have nothing to do with Intel, which is clearly on a roll and is a market leader, but the stock slumped anyway.

    And there is a lot of economic data for traders to react to this week.  The week opens with a report on existing home sales for December.  These are expected to drop sharply, as many acted to take advantage of the original expiration date of the $8,000 tax credit on November 30.  On Tuesday, reports on consumer confidence, as well as the Case-Shiller home price index will be released.  Wednesday brings the release of the Fed's decision on interest rates as well as new home sales data.  Then on Thursday, we'll get the initial jobless claims report from the Labor Department, as well as data on durable goods orders.  The week closes out with data on GDP, the employment cost index, and consumer sentiment.

    Quite a bit in there that can move markets.  However, as they say in informercials, but wait, there's more.  And while the more in informercials is often something that's just a throw in, the more here is far from it.

    Ben Bernanke's term expires in a week.  The Senate has to determine whether or not to appoint him to a second term.  This appeared to be a done deal unOfficial portrait of Federal Reserve Chairman ...til very recently, with only fringe players like Jim Bunning from Kentucky, who appears to have been beaned by too many baseballs during his playing career, opposing the appointment of Bernanke to a second term.

    However, Barbara Boxer and Russ Feingold have added their names to the list of those who will oppose Bernanke's appointment.  While the most likely outcome is still for Bernanke to get a second term, the announcement from these two democrats added to the nervousness of traders.

    If you think last week was bad for the markets, just watch and see what happens if the Senate doesn't cure its case of rectal cranial inversion and vote to give Bernanke a second term.  Look out below.

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    Jan 24 10:41 AM | Link | Comment!
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