Invest style: A man for all seasons

At least, some of them, anyway. Year in, year out, seasonal investor Brooke Thackray likes to pick his spots in the calendar

Globe Investor Magazine, Nov. 21, 2007
BY DALE JACKSON

FOR BROOKE THACKRAY, THERE was no single moment-no burning bush or falling apple-that told him the markets have a natural rhythm. But with each change -- of season, the Toronto native grew to understand that history repeats itself. Even as a child, Thackray took an interest in recording and charting what might otherwise appear to be random stock movements. "I was always looking at trends," says the 46-year-old father of four. "I'm a student of the market."

In the mid-1990s, during a stint as a registered investment adviser with TD Waterhouse, Thackray realized that his true calling was to spread the word about seasonality. This investment strategy is a form of technical analysis, which seeks to predict a stock's future value by weighing such factors as its historical price. As a seasonal investor, Thackray tracks and exploits opportunities tied to specific points in the calendar over many years. "I started noticing trends in the market and went back to analyze them," he recalls of his early efforts.

It's no secret that seasonal trends affect commodities and the broader markets. "Sell in May and go away" is an old strategy based on the fact that over the past century or so, equities have tended to perform better between October and May than between May and October. But Thackray takes seasonality several steps further to include just about any traded asset, from stocks to bonds to currencies. He claims that investors can profit and limit their risk by using advanced strategies that involve sector swaps or rotations throughout the year.

This steadfast belief led Thackray and his colleague Bruce Lindsay to quit Waterhouse and co-write the 1999 book Time In, Time Out: Outsmart the Market Using Calendar Investment Strategies. Ironically, their timing wasn't great. Equity markets plunged shortly after the book appeared, and by early 2000 the public had lost its appetite for investing.

Down but not out, Thackray went back to advising, this time at RBC Investments. It was there that he met Don Vialoux, who is now regarded as Canada's founding father of seasonality investing. With Vialoux's encouragement, Thackray launched Oakville, Ontario-based AlphaMountain Investments in 2004 and once again pursued his dream of becoming a full-time seasonal analyst.

He now publishes a monthly newsletter with more than 1,000 subscribers and his latest book, Thackray's 2007 Investor's Calendar, is a reference manual that identifies seasonal patterns over several years and pinpoints-sometimes to the day-strategies for maximizing returns and minimizing risk. "The seasonally strong period represents a portion of the year where the sector has a higher probability of rising than the market, or the market has a higher probability of producing above-average returns," Thackray says.

For example, his book recommends that investors buy gold stocks on July 27 and sell them on September 25. From 1984 to 2006, Thackray's research shows that the benchmark PHLX Gold and Silver Index climbed an average of 8.5% annually. By contrast, the S&P 500 Index fell slightly during that time.

The explanation? There is increased demand for bullion from late July through late September as gold fabricators prepare for Diwali-the Indian festival of lights-and the Indian wedding season. According to the World Gold Council, about two-thirds of all gold produced each year is made into jewellery, and India -is the world's largest gold market. "The net effect is upward pressure on the price of gold and gold stocks starting in July and a declining price at the end of September," Thackray says.

Thackray adds that the decline in the price of gold in late September is heightened by the tendency of central banks to sell what's left of their annual allotments. The Central Bank Gold Agreement outlines how much gold each participating country can unload, and some countries sell before the September deadline.

The oil sector has two seasonal patches where it generally outperforms the broader markets. The Investor's Calendar notes that between 1984 and 2005, the AMEX Oil Index-a price-weighted index of the world's leading oil companies-increased an average of 4.5% annually from July 24 to October 3. Over the same period, the S&P 500 gained an average of only 0.4%. Again, it's a question of demand: Between late July and early October, refiners need more crude to produce winter heating oil.

Thackray's book says the second seasonal trend for oil begins February 25 and ends May 5. That's because refiners are, once again, buying extra crude during these months to keep summer car drivers supplied with gasoline. Over the past 22 years, the AMEX Oil Index has gained an average of 8.6% annually from February to May, compared with 2.5% for the S&P 500 Index. It's also outperformed the broader market every year but two.

Thackray is just one player in the seasonality game, which has gone from voodoo status to being part of the mainstream, thanks to advances in research technology. Many large investment firms such as RBC Capital Markets employ technical analysts to produce breakdowns to complement their market research. Seasonality investing websites have increased, among them seasonalcharts.com and a seasonality report on Vialoux's dvtechtalk.com.

For do-it-yourself investors, information on historic price performance is readily available on the Internet. Also, the popularity of exchange-traded funds makes buying and selling specific indices and sectors as simple as clicking a button or placing predetermined buy and sell orders.

But the surfeit of accessible information can make seasonal investing risky business. Brian Acker, president and CEO of Acker Finley Asset Management, cautions investors not to read too much into past performance. "You can mine data till the cows come home because data is cheap," says Acker, whose Toronto-based firm has $200 million in assets under management. "People look at random events and then look for the best fit."

While seasonal investors analyze historic data, Acker values an investment through a forward-looking strategy that considers expected earnings, future profit growth, current interest rates and current market price. "Seasonal patterns might go on for 10 years, but there's nothing to say it will happen in the 11th," he says.

Some of the numbers trotted out in favour of seasonal investing are open to interpretation. Different timelines, in particular, can produce some very different findings. Take "Sell in May and go away," for instance. As part of his research, Thackray looked at the years 1950 to 2006. Investors who put their money in the S&P 500 each October 28, sold each May 5 and reinvested everything over that same six-month period would have seen their initial investment grow an average of 7.9% annually. Those who contributed the same amount during the other six months would have lost an average of 0.3% annually.

However, a study by U.S. investment firm Charles Schwab & Co., which examined data from 1926 through to 2002, found that the return for an investor who stayed in the market year-round would be almost four times greater than that of someone who jumped out between May and October. Although Schwab confirmed a summer lull in the S&P 500, the market return for those months still exceeded the alternative of cashing in and out. Trading fees further diminished returns from the seasonal strategy.

"Seasonal analysis is arbitrary to a degree," says Thackray, who admits the data can be tailored to support a preset conclusion. That's why it's easier to debunk a seasonal trend than discover one, -he says. Thackray explains that he starts his research by identifying a trend over several time periods and economic cycles. From there, he chooses the timeframe that best illustrates his point. To dispute such a trend, all a skeptic needs to do is find another time period where it is weak or nonexistent.

Then there's the fundamental flaw that almost any critic will flag-one that could make seasonal investing a victim of its own success. If everybody invests when a price is historically low and sells when it is historically high, then smart investors will buy and sell the day before the calendar date and keep moving the entry and exit points earlier.

"There's not enough people who do this for that to happen, and there never will be," Thackray counters. Still, he acknowledges that buy and sell dates can shift over time, as they have with the "January effect." Historically, stock prices have risen in January, on the heels of a late-December sell-off by investors seeking a tax loss to offset capital gains. But buyers have been moving the entry point closer to the start of the year, so the January effect is no longer much of an issue.

That's why Thackray's advice to fledgling seasonal investors is to research historic price movements and adapt to changes. "You need to get into it slowly and get a feel for it," he says. Thackray also warns against looking at a one- or two-year performance in isolation.

"It's not a one-time, short-term strategy."

As fall turns to winter, Thackray is hard at work on a new investor's calendar for 2009. It should hit bookstores when the leaves fall next year.