Sex and the January Effect!

A perplexing phenomenon for money managers and academics alike is the so-called “January effect.”  Also known as the small-cap effect it generally refers to the fact that January tends to be a pretty good month for the stocks of smaller companies.  Despite efforts to come up with an explanation – window dressing by institutional investors, tax-loss selling and so forth – there seems to be no rational reason for the superior performance of these smaller company stocks early in every new year.  Before devling into my own radical theory, is this a real or mythical phenomenon?

Personally, I’ve bet on this phenomenon over many years – loading up the mutual funds I’ve managed with smaller companies during December that I considered inexpensive (their share prices were beaten up for any number of reasons).  The strong January investment performance would often put my portfolio in the top rankings for several months into the new year.  Always good for business.  I’d also encourage clients to buy our specialty fund that concentrated on smaller growth companies in early January, and hold it for a few months to capture the excess return.  It simply worked.

Experiencing or just believing in the effect is one thing, but does the data support the myth?  There are many studies confirming the anomaly.  I found the adjacent chart illustrating that in in January the smallest publicly traded companies indeed do better than the bigger companies.

“From 1926 through 2002, the smallest 10% of all stocks (or “10th decile”) beat the 1st decile stocks by an average of 9.35 percentage points in the month of January.”

Despite repeated efforts to explain why there is a January Effect, everyone agrees that it still remains pretty much a mystery.  Academics refer to such patterns as ‘anomalies.’  My own belief is that there are many instances when statistical observations are better explained by human behavior rather than analytics.

Ever notice that most babies are born in August and September?  Biologically speaking, this would suggest that our species do tend to act somewhat differently nine months prior to these births every year.  During the festive season there’s a whole lot of warm and fuzzy feelings that seem to influence our behavior.  In some cultures there’s a surge in indulgences – food and wine for instance – and for a brief couple of months stress and fear are reduced signficantly.  How do we respond?

Clearly we are inclined to be more intimate.  Couples (if you’ve been married for awhile you’ll understand this) successfully avoid romantic activity for most of the year; bored with their partners or simply turned off by their annoying habits and personality flaws.  Suddenly during the holidays we set aside our grievances and become more tolerant. Those quirks might even seem endearing for a brief period.  Perhaps in the northern hemisphere humans are genetically engineered to seek warmth and comfort during the colder winter months?

 Consider these cold hard facts:

  • We are more than willing to be intimate (hence the birthrate 9 months later) despite the risks – being asked to do more chores and the inevitable burden of an increased level of conversation.
  • During these months we spend recklessly on family and friends who don’t need the consumer items and in some cases don’t deserve them.
  • People drink more alcohol than they should and eat food that is bad for them.

Why wouldn’t the perennial change in our emotional makeup also have an impact on our investment decisions?  My theory is that once a year risk aversion takes a brief backseat in our psyche – and while our hearts and wallets are open why not take some free-spirited risk in the stock market?  Collectively hoping for a big score in those smaller company stocks that occasionally pay big, we all dive in together and cause their prices to rise.

The evidence of humanity’s willingness to take on more risk in the bedroom during the holidays becomes evident nine months later.  And it should come as no surprise that the financial consequences of investment decisions made in a fit of euphoria during the holiday season also show up by September of most every year also.  September is pretty much always the worst month for those stocks bought earlier in the year – small and large companies alike.

I certainly hope you had a good laugh reading my theory explaining the mysterious January effect.  In my opinion it is certainly as good as the explanations you’ll read in the media.  Truth is there is much we’ll never understand about so-called ‘anomalies’ whether they occur in financial markets or in human behavior.  Simply knowing they do occur however can be a powerful tool when making one’s own investment decisions.  Come to think about it, just knowing about some behavioral anomalies might also help when it comes to family planning.

Best wishes to you for a Happy Holiday!

Malvin Spooner.

 

 

Kill Them While They’re Small

Math professors love to hand out problem sets.  Many a weekend was consumed resolving these.  One of my friends pointed out that problems are only problems if you don’t know how to solve them.  If you know how to solve them, they are merely questions.  The distinction is true outside the walls of a university too.

We get confused some times. We fix things that are not broken and apply difficult methods to easy questions.  For example, as Harvey MacKay has pointed out, “If you can solve a problem by writing a cheque, you do not have a problem, you have an expense.”  Too bad they are not all that easy.

Problems without known answers, come in two forms.  Big enough that you must deal with them and small enough that you can ignore them.  The trick is to know the difference.  Right?

Probably wrong!  It is the “ignore” part.  A problem you can ignore forever is not a problem to begin with.  I routinely ignore the traffic problems in New Delhi even though it ranks 5th in the world for traffic congestion.  So far no adverse consequences.

Small problems that you ignore, but cannot ignore forever, accumulate.  Eventually you have a large bag full of them and the bag takes on a life of its own.  Jordan Peterson at University of Toronto contends that stress results from the the accumulation of small undone tasks.  A bag of small problems is itself a big problem.

You cure the big bag of small problems issue by using two criteria:

  1. Can I ignore this forever?   if yes, ignore it forever.    if no,
  2. If it were a hundred times bigger how would I deal with it?

The 100-times bigger problem must be solved.  Understanding how you would relate to it at that size, will give you insight into how to remove the little problem.   For example, warranty claims when you could redesign a part to cure the problem.  Then  you must act on it and empower systems or people to keep it at bay.

As you do this, you will find that it takes less time than the ignoring method.  Remember that the ignoring method keeps issues coming at you while the solving method is done once, done forever.  (Well almost that good)

Once in a while, certainly not every time, facing down the little problem, gives you insight into what could have become a big problem in the future.  Even more rarely it gives you the insight into an opportunity.  The rare occurrence of these will pay you for all the effort elsewhere.

Killing big problems while they are small is a competitive advantage.  Use it.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

Bullying at work – the total cost – financial and societal Part 1 of 2

“Courage is fire and bullying is smoke.” ~ Benjamin Disraeli. For non-history buffs, Benjamin Disraeli was one of England’s most important Prime Ministers and noted around the world for his oratorical skills and his strong beliefs – and I subscribe completely to his perspective.

This article is a very large challenge for me to write. Unfortunately, I know first-hand of what he speaks from school, to various work locations and elsewhere – you can check out a blog I did by clicking on this link (http://money.ca/you_and_your_money/ian-r-whiting/) and go back to early October 2012. Recognition of bullying against children is coming to the fore and many new programs are being developed to help the victims and to re-educate, and as necessary, ensure there are severe consequences to the bullies.

What about bullying at work? Does it happen – absolutely and I had the misfortune to experience some of that too – but don’t feel for sorry for me – it simply made me more determined than ever to succeed – and I did!

“Bullies need to make others feel insecure because they are insecure.” ~Unknown

At work, it takes many forms – this is not an exhaustive list but simply representative:
a) verbal abuse such as public pressure to swearing, name calling and public belittling;
b) standing too close in a threatening manner or throwing objects while displaying aggressive behaviour and a speaking or shouting in a loud voice;
c) emotional abuse often takes the form of undermining a co-worker’s results, efforts, resulting work and their professional or business credibility and can lead to keeping track of and reporting every minor mistake or error;
d) character abuse often comes from “water-cooler” or “lunch-room” gossip, lying about another someone else or deliberately damaging their reputation; and
e) professional abuse through actions such as continually finding fault with their work in public forums, talking over them at meetings or ignoring their input.

Bullying is a lack of respect. It is often obvious – as you can see from the previous points, but it’s more subtle forms often cause more damage. It is responsible for increased absenteeism, a lack of workplace motivation, poor performance, employee dissatisfaction, increased turnover and a lack of trust together with the absence of team building with other workers. The financial effects of these consequences are enormous. Productivity always drops. As a result of the pressure on the abused employee, increased error rates are inevitable, work has to be re-done and even the non-abused staff are faced with negative consequences. All of this results in higher costs for the same end result – more sick-time, absenteeism, more stress-related health benefit claims. Added up across Canada, the cost is several billion dollars according to several studies. That cost is passed on to everyone – we all pay.

“Only cowards are bullies.” ~Unknown. It causes substantial damage to self-esteem and the ability to contribute at work. It can also be responsible for depression, physical illness and severe trauma and is some cases PTSD. Bullying is never acceptable in the workplace – or anywhere for that matter.