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The investment equivalent of keeping your fingers crossed

14th June, 2021

Published in the Sunday Times on 13th June 2021

For the superstitious amongst you, the month of May provides an annual opportunity to enhance your overall stock market returns. The “Sell in May and go away”, stock market aphorism recommends sitting on the sidelines through the summer until after the St Leger horse race which is in early September. 

Superstitions are a funny thing. Kolo Touré, the former Arsenal centre-half had a personal superstition which dictated he must be the last player to leave the dressing room. This caused a fair bit of upset during half time at a Champions League last-16 match in 2009.  William Gallas needed medical treatment and Touré refused to leave before him. Arsenal had to start the second half with nine players. He compounded the farce by bounding on to the pitch without the referee's permission, and was booked. 

More bizarre still is tennis star Goran Ivanesevic’s ritual of watching Teletubbies every day during his historic victory at Wimbledon in 2001.

Growing up, I recall my sister breaking a glass on purpose to avoid the uncontrollable influence of “it happens in threes”.  Better to control fate and break the third one on purpose than wait for it to intervene at random!  

Superstitions and investing

I don’t have much time for superstition, but I’m fascinated by the extent to which many others do. The number of high-rise buildings across the world without a 13th floor is testament to this (over 80% apparently). 

Superstition is simply a belief in the role of chance or luck and our ability to exercise control over it. “Leave nothing to chance” we often hear – suggesting we have much greater agency over outcomes in our lives than we do in reality. No more than heartbeat or hair growth, the influence of chance is outside our control. 

Blowing dice, touching wood, or refusing to open an umbrella indoors is one thing, but there is a sinister side to superstition in the more serious playground that is financial markets. 

The stock market is the perfect breeding ground for superstition. Research shows that people are more likely to resort to superstitious practices when operating in environments dominated by uncertainty, high stakes, and perceived lack of control over the outcomes. 

Sell in May and go away

Much has been written about the apparent “sell in May” anomaly. So consistent has this pattern been that there is a myriad of papers attempting to ‘explain’ it. It’s tempting to believe that we can enhance the returns from our portfolio from simply exiting the market for the middle four months of the year. Unfortunately, it’s more mirage, than miracle. 

Slicing and dicing stock market data to predict the future is big business. The stock market generates vast quantities of information. But remember, it only has one past. Scouring a vast selection of data to explain a small piece of financial market history, can produce bizarre results. 

Tortured data will inevitably throw up what are called false positives. These are relationships which appear to generate spectacular returns, by coincidence alone. This is known as data mining. 

These days, the data mining industry has become very sophisticated, but its usefulness is outside of financial markets. Financial markets violate many of the assumptions upon which statistical tests are based. 

And it’s always the interesting findings that get published – non-findings or failures face a much higher publication hurdle. Little harm maybe if it’s a study showing how adopting a Wonder Woman-like expansive body posture boosts your feelings of power (it doesn’t), but we need to be on guard when it comes to matters of money. 

Our starting point is believing

We have a truth default setting. We start by believing. We need to take a step back and ask one crucial question. Does what you are being told fit into the broader picture of what we know about the subject matter, or is it a strange outlier?

Are market timing strategies (like sell in May) in conflict with what we know about stock market investing? Arguably yes. Successful investing is really difficult. This is just one red flag, but a pretty important one. 

There are no certainties in investing. It’s impossible to guard ourselves against the vagaries of the goddess Fortuna, at least in the short term. 

Time is the ultimate noise filter. I cringe at trotting out the ‘take a long-term view’ mantra, but it is genuinely the only way of diminishing the role of chance in investment outcomes. 

If you’re investing with a short horizon, as a poker player might say, may the variance go your way. Or for the superstitious amongst you – keep your fingers crossed!

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