Timing and Temptation
There are no “latest seasons” in the share market. Purchasing and selling of our portfolios should not be managed in the same way we manage our fashion tastes and impulsive purchases.
You shouldn’t by stocks based on emotion, temptation or simply because they are experiencing a decrease in price. When we see a favourite item of clothing marked down, it is a great time to purchase it, however the same methodology should not be applied to stocks.
History indicates that when stocks are continuously “marked down”, they are not a good buy over the long run.
Let’s take a look at an example as provided by Stansberry Research of what this means today and then another perspective on when it is wise to purchase stocks that are “marked down”.
This example looks into the benchmark stock index (the S&P/TSX Composite Index) in Canada. The index fell for eight consecutive days from November 4 to November 13. An extremely rare case.
“Canadian stocks were “marked down” for eight straight days. Should you buy Canada now based on this? No, actually…Based on history, eight days of “markdowns” actually points to underperformance over the coming months…Specifically, looking back over the past 25 years, the S&P/TSX Composite Index has only experienced eight or more consecutive down days on five other occasions. The last one was back in June 2002.
Whenever this has happened, Canadian stocks continued to drop in the near term, on average. Take a look at the table below. It highlights the forward returns after each of these five occurrences…” (Stansberry Research)
| Trigger | Consecutive
Down Days | 3-Month
Return | 6-Month
Return |
| 12/12/1991 | 8 | -0.7% | -2.5% |
| 2/21/1992 | 9 | -6.0% | -4.8% |
| 6/14/1996 | 10 | 4.5% | 14.9% |
| 12/21/2000 | 8 | -13.7% | -10.2% |
| 6/14/2002 | 10 | -12.0% | -7.8% |
| Average | – | -5.6% | -2.1% |
“Canadian stocks fell roughly 6% in the three months after these markdowns, on average. Six months later, the average loss was 2%.
The numbers get “less bad” further out, with an average 2% gain a year later… But that’s still a large under performance compared with the typical 6% annualized gains Canadian stocks have produced over the past 25 years.” (Stansberry Research)
So, what do we learn from this situation? Simply that just because a market is “marked down” for eight straight days does not indicate that it is a good time to purchase. History tells a different story.
Let’s take a look into how we can successfully select winners from what have been deemed as historic “losers”? The key to success in this scenario is the time frame in which you make the purchase.
“We need a loser to be a loser for a long time before it will become an out-performer. Three years is about right… If you’d simply bought Canada’s stock market after it fell for three straight years, you’d massively outperform over the next few years. Take a look…
| Canadian Stock Returns | |||
| Strategy | 1-Year Return | 2-Year Return | 3-Year Return |
| After 3 Years Down | 33.8% | 50.3% | 79.9% |
| Buy & Hold | 8.5% | 17.8% | 27.6% |
Canada’s stock market tends to SOAR after falling for three straight years. But the “markdown” needs to happen over a long period of time before it’s a buying opportunity.” (Stansberry Research)
At UGC, our approach to selecting investments revolves around three key principals:
- Buying quality; ensuring long term performance
- Buying value; so as to outperform the average market return
- Buying trend; to ensure we compound our returns at a faster rate
If you have been considering purchasing stocks or wish to learn more about what options are available to you, please contact United Global Capital today for a no cost, no obligation consultation on 03 8657 7640 or email [email protected].
The information contained in this report is General in nature and has been prepared without taking into account your objectives, financial situation and needs.