We have reached the month of May, which usually sparks some investors to quote the phrase to “sell in May and go away”. The general theory behind this is the thinking that from now through to the end of the summer, the stock market allegedly underperforms.
Whether you believe this or not (the data doesn’t offer a clear answer) is up to you. Yet what about legendary investor Warren Buffett and his actions?
Considering the track record
Over his decades of investing, there’s zero record of Buffett selling the bulk of his holdings in May with the aim of buying back at cheaper levels in the autumn. I’d say that’s the most conclusive evidence we have that he doesn’t agree with the philosophy of markets underperformance during the summer. He also hasn’t advocated it in his shareholder letters.
Of course, over the years, he has sold stocks during May, but it appears to be in no way correlated to an actual strategy. Rather, he sells when he feels there’s no further potential gain to be had from holding a particular share.
Losing dividend benefits
Buffett invests for both capital gains and dividend income. A great example is his purchase of Coca-Cola shares back in 1994. In his latest annual letter to shareholders, he explains that in the first year, the dividends received from this stock was $75m. Last year, it was $704m!
He wouldn’t have enjoyed this jump in dividend income over time if he had sold each year in May. The ability to grow passive income from companies like this stems from the ability to be patient and hold the stock continuously for the long term.
Keeping it simple
One of the points I most admire about the seasoned investor is how he keeps his strategy very simple. He finds business that he feels are undervalued and holds them for the long term. He doesn’t get involved in trading and trying to flip stocks in a very short period of time.
That’s not to say that people can’t make money from trading stocks over the course of just a few days. But the point is that selling in May to try and buy after the stocks might have fallen just doesn’t fit in with Buffett’s strategy.
Given his track record of profitability, I wouldn’t say that this has hurt him in any way!
History doesn’t prove the theory
A great quote from Buffett is that “what we learn from history is that people don’t learn from history”.
What if it was true that stocks always fell between May and autumn? In that case, everybody would mimic it on their portfolios. Yet history doesn’t show me with enough conviction that this happens often enough to justify selling in May and taking on the risk.
As Buffett mentions, people don’t learn from history, which is why this investment adage still makes some sell in May.
