Resource Stocks: Sell in May, or Buy and Hold?

May 05, 2011 12:16 AM ET
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Contributor Since 2011

Dirk Burhans has worked as a biologist and data analyst for 20 years in the fields of avian ecology, wildlife management, and hospital research. An amateur musician, he also authored the potato chip history CRUNCH! (2008, University of Wisconsin Press). Although still interested in mining and metals, in 2016 he saw the error of his ways oriented himself more toward making the world and society a better place.

I frequent several silver & gold forums, and every year about this time I read the same comments regarding the summer; they go something like this:

"The powerful fundamentals underlying silver, gold, and resource stocks seems to be different this year. I really think that this time we might actually avoid the 'summer doldrum' phenomenon!"
The summer doldrums! Each year, as traders take time to paint the house or take a vacation, trading volumes go down, and investments -- particularly silver, gold, and mining stocks -- seem to putter nowhere through most of June and July. As my favorite financial analyst, Adam Hamilton, puts it: "Slow sideways-to-lower summer grinds are par for the course in PMs." In fact, the Hamilton article cited here does an excellent job showing just what to expect from gold during summer, which is pretty much... well, nothing.

But what about the resource stocks -- in particular, precious metal miners? This concerns me personally, because I hold many of these stocks, and have found over several years' experience that it is crucial to hold core positions in miners through the ups and downs of this secular bull market. And yet, I often wonder... what if I had sold them each summer and had the guts to buy them back during the alleged summer-doldrum lows? Could I be doing even better than I am now?


I analyzed precious metal mining equities in each of three categories: explorer (no production, shares typically < $1.50), junior (producing, share price ~$1.50-$14), and senior (shares ~$15-$50). I opportunistically chose eight miners in each group, typically choosing the first noticed from my chartlists that fit the category, but tried to balance each group with four silver and four gold miners (Silver Wheaton, SLW, was included as a senior silver miner). I tracked each group for three years -- 2007, 2009, and 2010 -- excluding the once-in-a-lifetime stock panic year of 2008, which also included a summer commodities dump. I entered each stock with an imaginary $1000 ($8000 per group).

Under the "Sell in May" strategy, I sold each equity on May 15 and re-bought it with those proceeds on August 15 of each year. Under the "Buy and Hold" plan, I kept the entire equity for the three-year (actually four-year) period. Under both plans I sold all equities on November 15, 2010 -- during the typical silver & gold seasonal peak.  Although I did not sell any stocks on May 15 in 2008, this should have affected each plan equally.


What did I find? Feel free to click on the table below to read it better:


The "Buy and Hold" approach -- the one promoted by most conventional advisors -- netted me over $6000 over 4 years -- a pretty decent 33% profit on my initial $24K outlay. Over those 4 years, stocks averaged 26.8% gains across all three mining sectors. If you note the junior sector in the table above, you'll see that they did not fare as well, with several small silver producers being particularly hard hit in the summer of 2007.

What about "Sell in May?" This strategy netted over $10K profit -- a 47% profit over the four years (average = 43.3%), and was at least nominally (if not statistically, which we did not test here) higher than "Buy and Hold" within each mining sector. Note the huge standard deviations (SD) -- the average deviation of each stock from the mean within its group across the 4 years -- especially for explorers, which are known for their volatility. Overall, "Sell in May" netted me 13% better gains than "Buy and Hold" -- not too shabby!

An observation: those huge standard deviations in the table above indicate that, while there were some stocks that did 50% better than their peers, some could also have done 50% WORSE. Take-home lesson? Don't put all your eggs in one or two baskets, especially when it comes to small miners -- who are subject to share dilution, regulatory obstacles, and political unrest (for those in unstable countries). Own a diversity of quality companies.

Some caveats: this sample is opportunistic over a small sample of years and a small number of companies. Also, buying the stocks back on August 15th may not be opportune -- in fact, July or even June could be the best, depending on the year and the stock. But for me, at least, the exercise is encouraging and prompts several questions. One question is: if "Sell in May" seems to work, why are mainstream advisors so enamored of the "buy-and-hold" mentality?

One reason might be that buy-and-hold truly did work during the stock boom of the late 1980s and 1990s. Back then, all one needed to do was sock away your money in stocks and watch it grow (unless you were caught in the tech and emerging markets bubbles of the 1990s). For many conventional investment professionals, buy-and-hold is the only investment environment they have ever known... hence their near-total inability to deal with the secular bear market starting around 2000.

Another reason for adherence to the buy-and-hold mentality, and a valid one, is that many advisors rightly realize that non-professionals are reluctant to step back into markets near bottoms. Because of pervading pessimissim during lows, cashed-out investors may continue to park their money in cash until stocks are looking so good that they are, in fact, ready to top out.

A final consideration: while "Sell in May" appears to work well across precious metals miners (with the possible exception of juniors, at least in this sample), it doesn't appear to be working right now in 2011. "Sell in March" would be the more appropriate paradigm this year, as most miners appear to have already peaked. In fact, several analysts recognized the miner selloff as a warning about the silver crash that we are now experiencing, with one analyst pointing out that the selloff sentiment arose right after the PDAC meeting in Toronto this March (I will add this link as soon as I can find it!).

But whether "Sell in May" works this year or not, it may nonetheless be something you want to consider regarding all or part of your portfolio. One way to look at it is as a mid-year portfolio re-balance... kind of like changing the oil on your car. Either way, selling in May might be worth a try.

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