One style of investment approach for a hedge fund manager is to find and profit from tax-loss losers during November and December and riding them through January.
Tax Loss Selling
Tax loss selling takes many poorly performing stocks to even more extreme lows nearly every year during the late fall:
- Mutual funds
- must realize such losses by October 31st
- Others
- have until December 31st
However, in many cases these stocks represent business under significant duress. Aside from a moderate January bump as selling pressure is alleviated and as stockholders once again buy into these stocks, one would not expect such despised stocks to truly reflect, in short-run, any realization of longer-term or hidden value.
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| Figure 1. After tax-loss selling in December, S&P500 recovered a bit in January. But, it fell even deeper in March (Source: Yahoo Finance) |
Caveats
During bear markets, sometimes stocks bought amidst the vicious sell-off of mid-December were no match for the vicious sell-off of later (e.g., March 2001; see Figure 1).
References
- Scion Capital Letters (2000 - 2002)
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