By: Philip MacKellar
Published: Dec 11, 2025
Why do we like buying stocks during December tax-loss selling, as others are trying to offset capital gains?
New subscribers and casual newsletter readers ask this often after hearing about our unorthodox strategy. The answer is straightforward. As contrarian investors, we want to buy when the majority of other investors sell. By doing so, the odds of finding a bargain and making more money improve.
Nearly every December, investors dump downtrodden stocks somewhat indiscriminately, making these hapless securities even cheaper. True to our contrarian philosophy, we swoop in and buy some of these shares as selling pressure mounts.
There are many times in the world of investing where selling pressure overwhelms buying demand, but none – that I am aware of anyway – are as widespread, consistent and predictable as December tax-loss selling.
In April, for example, I wrote about our crisis investing playbook and the purchases we made after markets tanked in response to U.S. President Donald Trump’s “Liberation Day” tariffs. Investors can wait exclusively for infrequent and unexpected market sell-offs like April to try and buy stocks on the cheap, but we prefer to take advantage of December’s tax-loss consistency as well.
Buying during December tax-loss selling not only presents investors with the opportunity to pick up names on the cheap, but it is often followed by the “Santa Claus rally.” This typically sees benchmarks rise during the final few days of December and first few days of January. It is then followed by the “January effect,” in which losers from the previous year rebound after investors who sold in December repurchase them in the new year.
While these seasonal trends do not always occur, when they happen following December tax-loss selling, the results can be a nice portfolio bump in the new year.
At this point, you might be wondering about the risks and the nuances before swallowing this argument hook, line and sinker.
The main risk is investing in a battered venture that continues to do badly. Sometimes stock market dogs are dogs for a reason, and try as you might, you will end up owning them – I have owned a few, anyway. To reduce the risk, we try to focus on companies with low valuations, strong financials, high insider alignment, a clear corporate strategy, and a positive catalyst underpinning the enterprise or sector.
Our top picks over the past few years have been tax-loss selling candidates with these positive characteristics in place. During the December, 2023, tax-loss season, for instance, we added to our Ceragon Network holding, and selected the wireless transport solutions company stock as a top pick for 2024. It went on to have an excellent year, and we unloaded half the position in early 2025 for a 161.4 per cent gain.
For 2025, miner Neo Performance Materials was our top pick. It was also a December, 2024, tax-loss selling candidate. The enterprise has had a great year so far. Although it has fallen from its high in October, we were able to trim Neo in August for a 144.1 per cent return.
These examples highlight how buying into beaten up stocks during December tax-loss selling can be lucrative, assuming the corporations in question have good fundamentals. But buyer beware, investing in a battered organization irrespective of its fundamentals may backfire.
The second risk associated with December tax-loss selling is macro economics. Sometimes the Santa Claus rally and January effect do not happen. Other times the broader market is overvalued, or the economy is headed for a contraction. When these macro events occur, just about the entire market – including the prior year’s tax-loss selling candidates – can have a terrible year.
In addition to these risks, the strategy works better in certain years than in others. Some years nearly all stocks are up, which makes for slim pickings. In other years, markets are down, which dilutes tax-loss selling across the entire index, thereby nullifying some of its benefits. The ideal situation occurs when some sectors are hot and others are cold. It is in this Goldilocks environment that contrary candidates get clobbered as owners dump losing positions to offset taxes on their wins.
This year looks like a Goldilocks setup, with a big caveat. On the one hand, certain sectors have had a wonderful year while others are down. This means the tax-loss pressure could be highly concentrated.
Sectors that we are looking at closely include retail, industrial, health care, some overseas securities, software companies, plus tech names that have missed out on the AI trade. Interestingly, we are finding as many high-quality opportunities in Canada as we are in the United States. This is unusual as there are many more stocks listed south of the border.
Despite this good setup, the big caveat is what comes next. Heading into 2026, the market and economy look dodgy. Investors are right to question the direction of the economy, the durability of the rally and the valuations in the AI space. If the market falls next year, it is likely this year’s December tax-loss selling candidates will have a tough year too. Nevertheless, our plan is to be active this December and convert some of the cash we have accumulated selling shares this year into new positions.
Finally, no discussion on our December tax-loss selling strategy would be complete without mentioning when we do take our losses. The answer is pretty much any time outside of November and December, with a bias toward May and August – but we will leave the why behind that strategy for another day.
Philip MacKellar is the General Manager at Contra the Heard Investment Newsletter.