USA Today has just published what might be the most irresponsible piece of financial journalism I’ve seen in the past five years of writing Get Rich Slowly. It embodies everything that’s wrong with the popular perception of stock-market investing.
Author Adam Shell touts a hot trading trend: Stocks jump on the first day of the month. Shell writes:
Stock investors looking for a trading pattern that all but guarantees a profit need look no further than the first trading day of a new month.
Everyone knows stocks trade in recurring seasonal patterns, with the best gains coming in the three-month period from November thru January. Then there’s the annual Santa Claus rally at year-end. Not to mention the January Effect, where small-fry stocks post fatter returns than big-company stocks in the first month of the new year.
But one of the biggest winning trades in 2010 has been Day 1 of a new month.
There are so many things wrong here. For example:
- There’s the notion that investing is all about timing the market, about finding “hot” times to get in and out.
- The second paragraph includes not only the “everyone knows” bit (I would never allow a staff writer or guest author to say “everyone knows” about anything on this blog, especially for something like this), but also the list of patterns, the last two of which are actually contained in the first!
- How does one buy on the last day of the month and sell on the first without losing a small fortune in trading fees? And what exactly do you buy? An index fund? Specific stocks?
- Not to mention the author used the word “thru”…and the editor let it thru.
The sort of “investing” promoted in this article isn’t investing at all — it’s gambling. I know plenty of people (including me!) who have lost money trying to find silly “get rich quick” shortcuts like this.
Because any fool with a spreadsheet can go hunting for meaningless patterns in stock market data, I decided to be that fool. I downloaded all of the data for 2010, and I ran my own analysis. Guess what? The first trading day of the month isn’t the only day that boasts just two losses in 2010.
The 8th trading day of the month has nine gains out of eleven! That must mean something! (And working backward, the 15th-to-last trading day of each month also has nine gains out of eleven.) But would you ever make it a rule to invest on the 8th trading day (or 15th-to-last trading day) of the month? Of course not.
If you want to avoid losses, though, you’d better watch out for the 10th and the 16th trading days of each month. They’ve only posted gains three out of eleven times in 2010. (Both the last and 2nd-to-last trading days of the month do as poorly.) But again, would you actually use this info for investing purposes? I doubt it.
In reality, anyone with enough time can go searching for patterns in past stock-market data. Lots of people have done so. But nobody I know has ever found a pattern that works going forward — except for buying the entire market and waiting a few decades.
Sarcasm aside, I’m not denying that the first trading day of the month has produced the biggest gains in 2010. (The Dow Jones Industrial Average has gained an average of 82.9 points on the first day of the month; there’s only one other trading day averaging over 44 points.) In fact, Shell points out this is an ongoing pattern:
The 2011 edition of the Stock Trader’s Almanac notes that in the 13-year period ended May 2010, the Dow “gained more points on the first trading days of all months than all the other days combined.”
But this isn’t an investment strategy. It’s gambling, pure and simple, and for USA Today to run this article as anything other than entertainment is irresponsible.
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@49 Suzanne. Absent any causation, one can still trade off of correlations as long as they continue to occur.
If the lottery numbers came up the same for 12 weeks in a row, there may be no legitimate reason, but I’m still going to buy a lottery ticket and play those numbers in week 13. Markets are not perfectly efficient, nor are they random in the long term. Trends do occur, and I make money off of them. Index investing is fine for the casual investor who does not know what he or she is doing. However, there are those that can and do make money with alternate strategies. To completely discount them is only doing yourself a disservice.
Those who can make money trading do, and those who can’t preach passive, index investing.
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To follow up on Andrew’s post:
It is not necessarily a matter of a person’s capability. It is their knowledge of the game (and it is a game, just with very high stakes) and the amount of time they can spend on playing the game (or hobby, if you prefer).
Those who have not spent time learning the game and those who do not have the time to play the game SHOULD use passive, index investing. GRS is not a place where those that play that particular game gather (at least not in large numbers)
A point of contention: In your first statement you say you can trade off the correlations without reasoning. While I agree it is possible, it is not necessarily a good idea. It is a VERY easy way to get burnt. Example #1: The people who are now underwater on their mortgages through no fault of their own.
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I find the “everybody knows” bit rather amusing…if everybody knows the pattern, shouldn’t it disappear, since everybody’s trying to exploit it?
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Trading fees are big business. That’s why all the smoke and mirrors with flashy strobe lights are used to destract you from what’s in plain text:
“Past performance does not guarantee future performance. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost. If an expense waiver was in place during the period, the net expense ratio was used to calculate fund performance.” from shwab.com
Unless you pull a Mcfly and travel to the future to pick up a Wallstreet Journal any “strategy” you pull from past data is nothing more than bupkis, conjecture and magic!
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@Strick: That is most certainly not the case. True, if it happened in the past for a particular reason, it does not HAVE to occur in the future for the same reason. However, the odds are in your favor that it will happen the in a similar fashion in the future if it happened for the same reason in the past. Thus “Those who forget their history are doomed to repeat it”
If what you say is true, why invest in stocks at all?
PS The reason for all the flashing lights is competition. Except the eTrade commercials. Those are all about getting you into the game before you know what you are doing. Ignore those
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I think you’re on to a new strategy and need to trademark it ASAP or I will. Did you see the pattern? The 1st, 8th, and 15th go up. I bet the 22nd does too. Every seven days it’s time to buy stocks! Giddyup! There’s 3 more buying opportunities this month! Of what, I don’t know, but add some stock shopping to your Christmas list!
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There are so many terrible new reports, print or video, regarding financial data. The toughest thing to accept regarding the stock market is that you are not smarter than everyone else. There is no secret pattern no one else knows about.
Occasionally if you are smart and informed, you can find a really good oppurtunity. But that happens only so often, and if you invest regularly you will start inventing oppurtunities that dont really exist.
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I agree with Andrew 100%. I trade actively and it has been quite lucrative for me. It takes lots of research time, yes, but it is absolutely a viable (and replicable) way to make money. Is it for everybody? Of course not. Neither is being a landlord, or working a high-pressure high-pay job, or running a small business, or any number of other legitimate money-making avenues. Most small businesses fail, does that mean no one should ever start a business because the odds are against them?
Index funds are a fine place to put your money if you don’t have the time or inclination to trade. There is nothing wrong with that. But I am a little tired of the trader-bashing that goes on here.
JakeIL7 says: “GRS is not a place where those that play that particular game gather (at least not in large numbers)”
I could be mistaken, but this gives me the impression I am not welcome here. That would be sad for me, as I have enjoyed reading GRS for almost as long as it has been around.
I know that active trading is currently taboo in the PF world, but I would encourage a bit more open-mindedness from this group, which I think tends to be of above-average intelligence and acumen.
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@Des, and all you other “Active Traders” out there.
I’m going to assume you’re smart. So, you must surely know that for every “winner” in the market, there is a “loser.” That is, when you trade a stock with someone, that stock can only go in two directions: up or down. If you were the buyer and it went up, you won that transaction. If it went down, you lost (and the seller won). It’s a zero-sum game. Those are the only two possible outcomes, agreed?
So, you seem to believe that you have a consistent ability to be on the “winning” end of the majority of your trades. That is, you believe you can consistently beat the average. Right? OK, stay with me here.
If you are consistently earning above the market average, and the people investing in index funds are guaranteed to earn exactly the average, then who in your universe are the losers? Where are all the losers who are enabling you to consistenly be a winner?
It’s a mathematical tautology that “we can’t all be above average.” Thus, if the indexers are guaranteed to be exactly average, and you think you’re above average, then who do you think comprises the equally-large group of below average traders?
Is it the institutional investors, with hundreds and hundreds of billions of client dollars at their command, and immediate access to market information, and instantly-executed trades?
Is it the pension fund managers, with hundreds and hundreds of billions of dollars, and their professional, experienced investing experts?
Just who do you think is on the losing end of all your trades?
Do you think it’s even remotely possible that in the long run, you will end up earning below average returns, executing trades in your spare time, with no investing education or experience at all, and your 20-minute-delayed stock quotes, and your “When-we-get-around-to-it” eTrade stock executions?
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@Kevin,
If it is a zero sum game then how does the “average” ever increase? If my winning $1 means you lose $1 then there would be a finite amount of value in the market which would never increase or decrease. That is just not the case. The value goes up over time. That means we can all “win”, so to speak, just some more than others.
So, let’s say I bought a stock yesterday for $10, and I sell it today for $12. I “won” $2. Now, let’s further say that tomorrow, it goes up to $15. I didn’t “lose” those $3, I just didn’t “win” as much as I would have if I held on. I won and my buyer won.
Does that happen every time? Obviously not. Some people lose lot’s of money. The same can be said of small businesses, many people lose lot’s of money, but we still consider it a viable option.
“then who do you think comprises the equally-large group of below average traders?
Is it the institutional investors…”
In a word, yes. You certainly know this to be true, that statistically actively traded mutual funds do below average. So, then, who do you think is on the other end of that? If they are, in the long run, below average, who is on the flip side?
Institutional investors have lot’s of information and tools, it is true, but they are also wielding huge amounts of capital. They can’t move in and out of a stock without affecting its price. That means they can’t move on their new information very quickly without tipping their hand, and that is a weakness that can be exploited by small investors who know what they’re looking for.
Not to mention mutual fund managers are expected to be fully invested (or, nearly so) at all times. If they thought the market was going to go tumbling down they can’t pull out and sit in cash until the storm is over. That means when the market tanks, they go right along. Individual investors don’t have such a restriction.
“Do you think it’s even remotely possible that in the long run, you will end up earning below average returns, executing trades in your spare time, with no investing education or experience at all…”
I don’t think someone with no education or experience will consistently beat the market. I think active traders who invest lots time in their education and research have the ability to beat the market. Is is “remotely possible” that I will end up with below-average returns? Yes, of course, in the same way a landlord knows that it is “remotely possible” their new tenant will trash their house, or an entrepreneur knows that his or her business venture may fail. Not everyone will open a business, and not all businesses will survive and thrive, but that doesn’t mean it is not a legitimate way to make money.
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@ Des,
You are confusing investing with trading. Investing is not a sum-game at all; however, trading (or trying to beat the market) is a zero-sum-game. Practically speaking, it is a negative-sum-game because of the added costs involved in trying. This means that out of everyone truing to beat the market, more money will be lost than gained.
The thing about negative-sum-games is the longer you play, the greater the likelihood that you will lose (and the greater the size of the loss).
Whether you actively trade or just buy and hold a total stock market index, you will still participate in the growth the traded companies. The zero/negative-sum aspect of trading is relative to simply holding the lowest cost total market index fund (that’s what you’re aiming to beat, right?) You are only better off trading if you can beat the other active traders at their own game. Not only that, but you must beat them by enough to cover your added expenses of trying.
This is why it is actually only remotely possible that an active trader can end up with above average returns. It has nothing to do with skill, it is just math.
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Both Pi and Requiem for a Dream were directed by Darren Aronofsky. Both movies near the top of my list. Experience them both!
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Well as far as “Buying and holding for a couple of decades”…this strategy ended up yielding me considerably less funds then I put into my Sons College IRA. Buy and hold makes no more sense then all the other “patterns” you discuss here.
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Although I am well-versed in passive investing with index funds, recently I’ve been mildly interested in active trading. In fact, hedge funds utilize alot of mathematics (obviously not as simple as buying the 1st day of the month..) to exploit patterns in the stock market to make alot of $. And there actually are people out there who make a good living actively trading stocks. But most people fail, so doling out advice other than passive investing is a bad thing in my opinion.
I however, have some money to invest. I used a very small amount of money to test a system that I came across a few months ago. It utilizes alot of company fundamentals, so it’s not 100% pure technical. So far it has been doing pretty well (beating the S&P 500). I still have most of my assets in index funds however.
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@JD #10 I first read that as “I need to quit drinking” and thought “AWESOME!” I was disappointed to re-read it and see it was “dinking around”. Second of all, holy throwback to Pi. That movie was absolutely crazy. Lastly, you need to write more stuff like this.
It has YOUR voice all over it. It “sounds” human, raw, real. LOVE it.
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