Sell in May and Go Away: How Dumb Is That?

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The “Sell in May and Go Away” concept originates with Wall Street evidence suggesting that the stock market performs at its worst from May-September. To play on the Motley Fool motto “Helping people to invest. Better” the phrase “Sell in May and Go Away” represents one way people can invest: Worse.

First, an investor who subscribes to this philosophy will incur commission costs and capital gains taxes in taxable accounts lowering return on their investment. Second, the philosophy involves stock market returns as a whole and not the particular performances of publicly traded businesses.

Here’s a hypothetical example involving two investors who own three excellent publicly traded businesses: irrigation and road barrier maker Lindsay (NYSE: LNN), entertainment conglomerate Walt Disney (NYSE: DIS), and online auction house and payment processor eBay (NASDAQ: EBAY).

The one who sold in May and went away

The first investor read somewhere that “Sell in May and Go Away” represents a good idea. Come May 1, 2012 he did just that and sold his shares in the above three companies incurring commission costs and capital gains taxes. This is unfortunate. This investor would have missed out on gains of 19%, 18%, and 9% for Walt Disney, eBay, and Lindsay respectively between May 1, 2012 and the arbitrary repurchase date of Oct. 1, 2012 (see chart below). Moreover, this investor incurred commission costs when repurchasing at the end of the period. Even people who invested in index funds lost out if they sold. The S&P 500 and Dow Jones gained 3% and 2% respectively during that time.

<img alt="" src="http://media.ycharts.com/charts/0c93b71f21aa173e552124fb0f5bc34d.png" />

EBAY data by YCharts

Stay in May

The second investor realized that he was sitting on excellent businesses which sold needed products and/or had high barriers to entry translating into good fundamentals as a result.

For example, with Lindsay, this investor understood that food production serves a vital role in the functioning of civilization creating demand for Lindsay’s water irrigation systems. In addition, this investor realized that food demand will rise as affluence increases in the world’s emerging economies. Also, that investor came to the conclusion during the “Sell in May and Go Away” period that the drought during the summer of 2012 would increase the price of corn, increasing the profits of farmers lucky enough to harvest giving them money to invest in new irrigation equipment.

Finally at the end of Oct. 2012, this investor would have seen in Lindsay’s form 10-K that sales increased 15% for the year due to increased demand for its irrigation systems. This investor realized that farmers need irrigation systems to keep up with rising global food demand boosting profitability over the long term. The investor decided to hold his shares for the long term.

Since the beginning of May 2012 Lindsay gave long-term shareholders who didn’t sell in May a 21% return on investment exceeding the S&P 500 return of 16% (see chart below).

<img alt="" src="http://media.ycharts.com/charts/43a081c2a5cacd4d0568d6678e01d1c9.png" />

LNN data by YCharts

The long term investor also realized that Walt Disney owns a portfolio of science fiction characters and an animation factory in the form of Marvel Entertainment and Pixar. In addition, Disney also owns successful theme parks, cruise lines and a powerful sports entertainment network called ESPN.

During the “Sell in May and Go Away” period of 2012 Walt Disney released two quarterly statements highlighting sales increases of 6% and 4% stemming from robust growth in its parks and resorts segment and growth in the media networks that includes ESPN.

This investor held on through the supposed down months of “Sell in May and Go Away” and beyond. On Oct. 30, 2012 Disney bought Lucasfilm adding Star Wars and Indiana Jones to its vast library of fictional characters. More recently, a movie based on a Disney owned character Iron Man blew away the box office. In 2015, Walt Disney intends to release a new Star Wars movie.

Seeing all of this, the investor concluded that a bright future lies ahead for Walt Disney and they knew that commission, taxes, and opportunity costs would diminish future returns if they sold every May and repurchased in October.

In the chart below you can see this particular investor reaped 53% since the beginning of May last year versus the S&P 500 return of 16%.

<img alt="" src="http://media.ycharts.com/charts/5660078982a4e224395b7fa6d1843eaf.png" />

DIS data by YCharts

The long term investor also knew that eBay’s online payment platform PayPal would capitalize on the long term trend toward mobile and e-commerce. For the quarter ending June 30, 2012, eBay’s payments revenue increased 27%, outpacing the growth of 9% in eBay’s more traditional “Marketplace” segment.

In eBay’s most recent quarter, payments outpaced the marketplace segment by 5% growing 18%. The long term investor stands by eBay in a long term partnership. He knows that mobile and e-commerce will continue to add to his wealth long term.

Being eBay’s partner since May 1, 2012 proved profitable giving shareholders a 36% return versus the 16% for the S&P 500 (see chart below).

<img alt="" src="http://media.ycharts.com/charts/e2b4b52f5d6e9558a0f1daf3e7b62dc5.png" />

EBAY data by YCharts

Conclusion

Forget that you ever heard “Sell in May and Go Away.” Adhering to that philosophy can cost you in terms of commissions, taxes, and opportunities. Buying businesses with strong brands, wide moats, and that are capitalizing on paradigm changing trends represent your best bet on achieving wealth.

It’s easy to forget that Walt Disney is more than just the House of Mouse. True, Disney amusement parks around the world hosted more than 121 million guests in 2011. But from its vast catalog of characters to its monster collection of media networks, much of Disney’s allure for investors lies in its diversity, and The Motley Fool's premium research report lays out the case for investing in Disney today. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. So don't miss out -- simply click here now to claim your copy today.


William Bias owns shares of eBay, Walt Disney, and Lindsay. The Motley Fool recommends eBay and Walt Disney. The Motley Fool owns shares of eBay and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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