Why we take dealing with losses in stride

By: Benj Gallander and Ben Stadelmann

It’s very popular this time of year to say, “Sell in May and go away.” Does it work? Well, not really. Since 1945, the average market gain from November through April has been about 6.7 per cent. Meanwhile, from May through October it has registered at 2 per cent. While it is certainly far less, those months remain positive. We suppose that if someone has an enticing, alternative place to store their funds during the latter period, it could prove beneficial, but is it worth the effort and the associated fees of selling and buying? Not from this angle.

What does have value from here is looking to take tax losses at this time of year. Many investors delay until December and even the waning days of Christmas to toss their losers overboard. People often wait until the last moment to do things or because, hope against hope, maybe the position will have a lift at the end of the year. Alas, that’s when many other shareholders are also dumping, and as economics 20 teaches us, that increase in supply will lower the prices to be achieved. Clearly not a good strategy.

Unfortunately, we have some losers, and Benj has been working through his list to decide which ones should be on the chopping block. It is important to remember that a stock can be sold and repurchased after 30 days once the loss has crystallized. If a person believes in a position, the hope is the price does not run away between the time that it is vended and can be repurchased. Furthermore, one should consider that losses can be written off against gains for the past three years, thus it can be worthwhile to knock out those losers against previous winnings before the time is lost to utilize this tax-efficient strategy.

One stock that has been a major disappointment and written about in this column previously is Aegon N.V. AEG-N, a Dutch-based enterprise that specializes in insurance, pensions, retirement and asset management. Purchased nine years ago at $7.64, with an initial sell target of $20.34, the entity has not even reached $7.50 during the holding period. Currently it trades around $4.50. This is how you spell “failure.”

This corporation is no small potatoes. Around since 1844, it has a market cap north of US$9-billion and operates in the Netherlands, the Americas and the United Kingdom. CEO/chairman Lard Friese enunciated some clear goals when he arrived in the executive chair in March, 2020, but was forced to deal with the stiff headwinds of the pandemic immediately, which made them difficult to achieve. Operations took a major hit, and as with many other European financials, it followed the desire of regulators who urged companies in this field to suspend dividends and buybacks. After Aegon complied, the share price dropped to the lowest level since the 2009 financial crisis.

Meanwhile, Mr. Friese has been buying, selling and reshaping operations like moving pieces on a chess board. The pace has been rather dizzying, and it is difficult to know if most of the changes have been effective. Regardless, every purchase and sale has friction costs, often accompanied by writedowns. While operations often must be bought and sold to improve an organization, the speed with which Aegon has done them gives us pause. Was this simply too much, too soon, without enough thought? Though we cannot enunciate a clear answer, our suspicion is that it has been.

Management seems confident that the turnaround is going well, even though two quarters ago the net loss was €2.4-billion, which was largely the result of classifying the Dutch unit as being held for sale. Meanwhile, capitalization ratios are good, there is lots of cash in the till, and cash flow is positive, albeit skimpily so. Ultimately, though, results were positive enough that dividends are being declared again, accompanied by a share buyback. The dividend works out to better than 4 per cent. Odds are the corporation will be profitable this year, as it has been in eight of the last 10 years.

So, what is Benj thinking? Before a sale is done, he looks to see if the stock has an annual pattern. In the case of AEG, nothing sticks out more than random probability would dictate. Noteworthy, though, is that virtually every year the stock pops above $5.25. So patience will be applied to perhaps score a higher price, and that will be considered the minimum for a stock sale in the next six months. Evidently it will not be sold this month. Meanwhile, the initial sell target is being slashed to $7.24, as revenues are just over half what they were a decade ago.

If the tax loss is taken, reconsideration will be given to buying it back at the end of the year during tax loss season, in December. It does seem unlikely, though, as our goal of a 100-per-cent-plus upside will likely not be met by the reduced sell target.

It would be delightful to never have to deal with losers. But unfortunately, it is the nature of the beast. Taking losses pragmatically can mean extra funds in your pocket at the end of the day, though that is by no means easy. This is especially the case as biases from being a long-term shareholder are not easy to overcome.

Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter.