How to turn $100 into $9.6 Billion

Hi Simon,

I agree you can make money either way (long term or short term)....

However, I wasn't fully sure what you were getting at.... Could you explain more what you mean?

Dien Rice

I have an idea why the January effect might take place.

Mind you, this is something I thought of, and I haven't really studied it or seen any studies of it recently.

Perhaps the January effect is caused by the actions of large portfolio managers.

There is a tendency amongst Portfolio managers to adjust their portfolios towards the end of a reporting period (end of December in the US, I believe).

That is, if you're a portfolio manager and you've invested in shares that have made a loss or gotten bad press but are still good value, you better sell them and get something that looks better before reports come out!

This is also called "window dressing".

I was first made aware of this practice when talking to a family friend who used to manage a superannuation fund for a large company here in Australia.

Apparently it's quite common.

Another possible reason is tax-loss selling. Let's say I've invested in Company Z and it's gone down 20%. I might want to sell those shares in December so I can have the Capital Loss be deducted from my Capital Gains, and thus pay less tax for that year.

But why not just buy it back straight away? Well, in the US and elsewhere there is a thing called the "Wash Sale Rule" that says if sold shares are repurchased within 30 days, you can't claim a tax deduction for losses on it.

So if you sold in December for tax reasons but still like the company, you can't rebuy the shares until January.

Likewise, if a company has bad press but is still a good company and you're a portfolio manager, subject to public scrutiny, might as well add it back to your portfolio in January.

These are two *possible* reasons for the surge you tend to see in January.

No doubt there are other explanations you could come up with, though. :)

- Thomas.

> There are also effects due to the months of
> the year.... One of them is called the
> "January effect."

> To give credit where credit is due, I first
> learned about this earlier this year I think
> from my brother Thomas.... :)

> Studies have shown that about 1/3rd of the
> year's raise -- especially for the stock of
> smaller companies -- tends to occur in
> January!

> They're not completely sure why.... It could
> partly be due to the more positive feelings
> of the beginning of a new year....

> However, it's an interesting effect to know
> about....

> I learned about it due to the book (which
> Thomas showed me), "The Winner's
> Curse" by Richard H. Thaler (who's a
> Professor of Economics at Cornell
> University).... Chapter 11 is called
> "Calendar Effects on the Stock
> Market".... :)

> Dien Rice

Amber, thanks for the two posts to my question. I'm rushing off to do some errands. If I've got any more questions or comments, I'll post them.

Regards,
Elizabeth,

Dien,

I was following Michael's observation.
It's about psychological preferences.

Why the idea of immediate wealth/gain/action is more attractive than steady/long-term activity?

My understanding:
People are attracted to immediate/miraculous measures for a very good reason.

I will get back to this reason later under a separate thread.

Simon