Is There Such a Thing as the "Perfect Time to Buy"?
Feb 23rd 2012 4:20PM
Updated Feb 23rd 2012 4:38PM
I have to admit that I can be a pretty superstitious guy at times. It's not as bad as feeling compelled to go out of my way to avoid cracks on a sidewalk or turning the lights on and off three times when I enter a room. But I have been known to put on my jewelry in the same order each day and to ritualistically go to the same restaurants on the same day each week. Without some sense of normalcy, my day just doesn't seem to flow right.
This got me thinking that, while a lot of this is in my head (trust me, I know I can be a bit nutty at times), could there actually be superstitious patterns to stock market returns? In essence, is there actually a "perfect time to buy"? Given my own neurotic tendencies, I decided this was worth further research.
What month to buy
The first factor I wanted to determine was which months generated the best returns. Thankfully, the S&P 500 has supplied us with bountiful data over the past 40 years in this respect:
Source: S&P 500 historical data
As you can see from the above chart, Santa Claus tends to bring the best rallies, although November puts up a good fight. September brings up the rear, with February also costing investors recently.
Which day to buy?
Now that we know December has historically provided the best returns, I feel we should look at which day of the week has offered the greatest statistical advantage. For this study, I found data from Tech Farm, which looked at the returns of the S&P 500 between 1962 and 2007.
Source: Tech Farm.
Monday is the only day that exhibits negative returns over this 45-year period, while Wednesday has clearly offered the best returns.
Taking this into account, I sought to establish which week in December would offer the best returns. Without drawing this out into a lengthy chart, the week before Christmas has offered double the average return of the S&P 500 for the rest of the month of December since 1928 (0.3% versus 0.15%), and it has returned an astounding 0.81% over the past 20 years.
So we've got it now, right? Buy on Wednesday the week before Christmas! Not so fast...
The Economist recently did a study that based its returns on Chinese Zodiac signs. Based on their findings, three of the zodiac signs (the goat, snake, and horse) have provided negative real-money, inflation-adjusted returns since 1900, while the other nine have offered positive returns. Of those nine, the rabbit has provided the biggest boost to portfolios with a real-money average gain of just below 10% per year.
There you have it, folks -- based on the above historical data, Dec. 20, 2023 will be the perfect day to buy your stocks!
Throw your superstitions out the window
So, are you running out to mark your calendars? No? Yeah, me neither!
That's because there is no successful method to timing the market. It simply doesn't exist, because the data are always going to be changing with corporate, political, and economic events. The zodiac data can be easily influenced since the dragon, rat, and monkey are the only signs that will ever see a presidential election. Historically the stock market has performed better during election years, as incumbents will do anything within their power to boost the economy and gain re-election. Even something as simple as one incredibly good or bad year can skew these results dramatically.
Now, that's not to say that some companies don't show extreme seasonal cyclicality in their business results. For instance, TJX (NYS: TJX) and Macy's (NYS: M) are retailers that appeal to cost-conscious and affluent consumers, and both make the bulk of their profits around the holiday shopping season because that's when their customers are most prone to shop.
Intuit (NAS: INTU) , the maker of my personal favorite tax software, Turbotax, gets more of its revenue from the quarter ending April 30 than in the rest of the year combined. Last year, all of its yearly profits came during that key quarter containing the April 15 tax deadline; the rest of the year weighed in with a small loss.
The travel industry has similar cycles. Royal Caribbean (NYS: RCL) and Vail Resorts (NYS: MTN) are heavily reliant on the seasons, as Royal Caribbean Cruises generates most of its profits in the warmer summer months, while Vail can't make any money unless there's snow on the ground in the winter.
But just because the business is cyclical doesn't mean the stocks are. If you had tried to time these stocks, you might have missed out on these long-term returns:
Return Since Feb. 1, 2002
|Royal Caribbean Cruises||81%|
Source: Yahoo! Finance. Return as of close Feb. 22, 2012.
If this grouping of stocks proves anything, it's that the cyclical timing of a stock is irrelevant. Investors know that these stocks have built-in strong points during the year, but their stock prices accurately reflect this.
So, there is only one correct answer to the question, "Is there a perfect time to buy?"
If historical data has shown us anything, it's that the market indexes have tended to trend higher over the long term. With a long-term approach in mind, there's absolutely no need to try to time the market. Although it's impossible to predict the movement of stocks with guaranteed accuracy, with innovation on the side of investors, corporate profits are likely to grow, which should translate into long-term investing success. Take those market-timing superstitions and throw them out the window!
Disagree with me? Tell me and your fellow Fools about it in the comments section below.
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At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. He once went a stretch where he didn't work on Tuesday for 10 straight years because of his superstitions. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Vail Resorts. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that believes in the long-term.
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