The taxing question of when to jettison our losers

Benj Gallander and Ben Stadelmann
Friday, March 14, 2003

Optimizing a system is a difficult process. Recently, we have been questioning the logic behind selling our tax losers in August/September, but unfortunately, we lack empirical data to predict when on average is the best time to dump these urchins. Guess we still don’t know it all.

The standard practice for many people is to cleanse their portfolios in December, during the last-minute madness of tax-loss selling. This makes no sense because with so many people dumping, the supply of stock being offered jumps, lowering its price. This is Economics 101, the law of supply and demand, in its purest form. At Contra, we take advantage of this circumstance, often scooping up more than 75 percent of our annual purchases during a ten-day annual buying spree that normally finishes just after Boxing Day.

We hoped to exit our losing positions before they were driven down further towards the end of the year, hence our practice of selling in August/September. It made sense to us until someone who recently read Benj’s book, The Contrarian Investor’s 13, e-mailed to ask if it would not be more logical to sell before stocks went into their seasonal “dark period” from May through October. Hmm.

The question for us, to be more specific, is: Are stocks that have decreased in value more than 15 percent or so from our purchase price likely to fall further before our normal tax-loss period of August/September? We are picking the brains of colleagues who are more technically minded than us in an attempt to find an answer.

The one who might be closest to an answer is Alexander Shetinin, the brain behind the appropriately named Shetinin Report. Alexander, a Ph.D., is a magician with numbers, the kind of guy for whom spreadsheets were invented. He seems to think it might be valid to sell earlier in the year. Shetinin stated, “The end of April and the beginning of May were proven to be the best time for closing positions for any holding period. Chances to obtain better returns or minimize losses have been 2.5 times higher for this unconventional sales time, than for any month of the year over the past 50 years.”

While we continue to search for corroborating data, one of the losers we are analyzing for an advantageous exit point is Service Corp. International, the huge funeral home operator that we purchased at $4.51 (US) in December 2001. Currently trading at $2.92, we still like this company’s prospects and, were it not for the tax-loss possibility, we would keep it in the portfolio. In fact, we rate it as a “Buy” with a target price of $13.84. But given our loss, might it be wise to dump it soon, while leaving open the possibility of a repurchase later in the year? Decisions, decisions.

Maybe you have some info on the optimal time for this tax-loss selling? If you do, drop us a line. We’re listening. The Contra system continues to evolve.