I’m not feeling well this evening, so this will be a short post dealing with one simple issue. (If I have strength, I may do one more.)
The January Effect is one of the best known calendar anomalies. Stocks and high yield bonds tend to do well after the first day of the new year. This happens because these assets get oversold as some investors sell losing positions for tax reasons. This tends to be more powerful for stocks that have done poorly over the past year, and for small companies, and value stocks. This year it seemingly hasn’t happened. Why?
First, all anomalies exist within a broader market environment. When enough market players jump onto an anomaly, the anomaly outperforms in the short run, but peters out, because all interested parties have bought in. If that were true of the January Effect, we would see the gains made in December, rather than January. That’s not what happened this year. (Anomalies tend to do best when they are ignored.)
Second, in a market where small value stocks may be overvalued, the January Effect could disappear for a year while small value stock valuations adjust back to normal, or below that. That might be true this year.
We are in the winter season, not just for the calendar, but for small stocks and value investing. I feel the winter chill in all that I do at present, and no, I am not talking about the lack of insulation in my hovel. I have the winter wind in my face now (much as I remember walking home from high school in Milwaukee), and yet I know that this is the time that my best purchases are likely to be made. I have to focus on my core disciplines, and buy good long-term cash flow streams cheaply.
Before I close, I would say that a new favorite blog of mine is the CXO Advisory Group blog. For quantitative investors, there is a wealth of knowledge there.