<THE FOOLISH FOUR>

More on Seasonality
by Bob Price
(Sandy)

Houston, TX (Sept. 29, 1998) -- In response to last week's column, one question poured in: WHY is it best to invest in the Fool 4 or RP4 in January?

You guys don't always ask easy questions, do you?

There have been lots of research papers and books done on the subject of seasonality. Michael O'Higgins even mentions it in Beating the Dow.

My belief is that it includes the following factors, to a greater or lesser extent:

1. The most frequently cited reason is tax-loss selling. As high-income people come to the end of the year, they start thinking about their tax liability. They sell their losers sometime in December, only to buy them back 31 days later (if they still like them) to lock in a tax loss. This tends to make stocks that have done poorly in the previous year go down even more at the tail end of the year -- giving us bargain hunters a better buy-in point.

2. Many mutual funds report the results and details of their portfolios on an annual basis. They often engage in "window dressing" before this. That is, if they have stock "X" in the portfolio and it's down a lot, they sell it so that when they report on their portfolio to their investors, they don't have large losers showing up there. That tends to have the same effect as (1) around year-end -- depressing the losers more than they might otherwise be depressed. There is also a tendency for fund managers to dress up their holdings by buying winners. When that year-end report comes out, it looks good to have last year's big gainers on the list of holdings. This might also contribute to a slight rise in price for some of the stocks you are about to sell.

3. Many traders go on vacation around this time. Traders (as opposed to investors) don't like to have stock positions they can't actively watch. Most sell all their positions before leaving on vacation.

4. People spend more money at Christmas than at other times of the year; this can cause selling as well. Gotta cover those Visa bills! The problem with this theory is that you might not expect the rebound to come so quickly :-).

All that selling makes the stocks that haven't been doing so well (the very ones we are interested in) drop a bit more in December than they might normally fall. Then when January rolls around, prices tend to return to "normal." But there is another factor -- the lower prices have increased the stock's dividend yield. Now, the big pension funds and some mutual funds find those increased dividend yields pretty attractive. Even a little bit more interest from these big guys can cause more buying that can push prices up.

The January effect is just one aspect of the Foolish Four strategy. The other is the actual business turnaround that we hope will come. But, obviously, buying in when stocks are "on sale" can increase your overall returns.

Next week: The story of RP -- and why it works.

Current Dow Order | 1998 Dow Returns

What Happened to Robert Sheard?

09/29/98 Close

Stock Change Last -------------------- UK - 3/8 42.88 IP - 3/16 49.00 MO + 3/16 46.25 EK -1 3/16 77.94

Day Month Year FOOL-4 -0.63% 10.98% 12.42% DJIA -0.35% 7.18% 2.18% S&P 500 +0.03% 9.55% 8.10% NASDAQ -0.30% 15.66% 10.42% Rec'd # Security In At Now Change 12/31/97 206 Eastman Ko 60.56 77.94 28.69% 12/31/97 289 Int'l Pape 43.13 49.00 13.62% 12/31/97 276 Philip Mor 45.25 46.25 2.21% 12/31/97 291 Union Carb 42.94 42.88 -0.15% Rec'd # Security In At Value Change 12/31/97 206 Eastman Ko 12475.88 16055.13 $3579.25 12/31/97 289 Int'l Pape 12463.13 14161.00 $1697.88 12/31/97 276 Philip Mor 12489.00 12765.00 $276.00 12/31/97 291 Union Carb 12494.81 12476.63 -$18.19 CASH $754.73 TOTAL $56212.48