Buying amid tax loss selling
BENJ GALLANDER and BEN STADELMANN
Yes, folks, this is it, the time of the year when we typically do the vast majority of our buying.
Why? Well, think of your job or hark back to your student days, whenever you were faced with a distant deadline. Of course you got things done well in advance, but so many of your colleagues waited until the last moment. Such is the way with tax loss selling season, which is moving into full swing.
While people have all year to sell faded positions, many delay their decision, dumping their losers at roughly the same time, increasing the supply of certain stocks and lowering their prices, as per Economics 101. That's when we like to get in on the demand side of the equation.
What usually follows is the Santa Claus Rally and the January effect, where stocks have a tendency to do well. On average, this boost works out to about half a percentage point. Historically, we have noted that the companies we buy tend to bounce upwards even more after tax loss selling abates and attention is garnered from a new crop of investors.
This annual cycle never seems to change. It proves reliable year after year. Worth noting is that our buying is not extensive — in a normal year, one to four positions will be added to the two portfolios.
Our cherry-picking is very company-specific. Beaten-up positions that institutions would steer clear of are those that capture our interest. But we do love sectors that are out of favour. Currently, our Stock Watch List includes coal, oil and gas, drillers and gold outfits. U.S. financials, which have been heavily featured in our purchases over the past number of years, still offer potential.
That does not mean that we will necessarily buy anything in these arenas, as we still need to find a few candidates with suitable balance sheets, income statements, and cash flow and financial ratios, and that look good by numerous other metrics. But these are indeed playgrounds that offer intriguing possibilities.
Unfortunately, not all of our picks work out, so tax loss selling becomes a wise move at our end, too. It is important to take advantage of Revenue Canada's rules so as to reduce our annual pledge. As a general directive, our losers are weeded out in the spring, long before tax selling. Sometimes, we will even repurchase these stocks later in the year, obtaining the benefit of cheaper prices and, hopefully, future capital appreciation.
Currently, our focus on paring down the many nominees that we scrutinize throughout the year to reduce them to a short list of contenders. Out of those, the goal is to pick our future all-stars. Upcoming columns will feature a number of those. Call this the teaser. Please stay tuned.