Summary
- January 2023 was an amazing month to be long equities. The Russell 2000 index was up 9.8%.
- Before the first opening bell of 2023, I created an equal weighted and bespoke list of twenty nine stocks for my January Effect 2023 model portfolio.
- The January Effect 2023 portfolio generated an amazing 34.2% monthly return!
There is a reason why Sir Warren Buffett ( BRK.A ) ( BRK.B ) is far and away my favorite value investor of all time. Incidentally, I just wrote an article on Warren Buffett that focused on why he doesn't believe in or practice market Timing. Just to clarify, when I say 'Market Timing', I'm referring to trying to pretend that anyone can regularly run between raindrops and consistently predict broader market movements. Somehow market timers must convince themselves that they can optimally sell at the pinnacle, buy at the trough, and gracefully miss the drawdowns along way.
To a logical and rational person, the notion that there is a magic bell that rings at both the bottom and top is akin to believing in leprechauns, rainbows, and pots of gold. Yet, perhaps the human brain is wired a certain way such that people somehow believe they will be the exception, the one in a million, or perhaps fear and greed are more powerful emotions than logical thinking.
To be crystal clear, I'm a stock picker, so I believe the market is relatively inefficient and prone to bouts of extreme pessimism and optimism. That said, after being at this game, informally and formally for well over twenty years, I've learned, and paid some expensive tuition, to Mr. Market (and I can't put that on my resume, either), that market timing is a huge waste of bandwidth and definitely not the way to generate superior returns, over long periods of time and different market cycles. In other words, I would argue that picking stocks is worthwhile and different than trying to time the broader market. The broader market and global economy is far too complex and exogenous shock can and do occur. So it boggles my mind that way too many people think there is some magic formula or someone has cracked the code on market timing.
Moving along, before we kick off today's brief note, I want to highlight two specific Sir Warren quotes, to draw a bit of a distinction between picking stocks and market timing. If you're a reasonably good thinker then context, subtext, and nuance are critical components of the synthesizing process. Enclosed below are two specific quotes, written by Sir Warren, that should help clarify points of confusion.
Warren Buffett's 1985 Annual Shareholder Letter:
Most institutional investors in the early 1970s, on the other hand, regarded business value as of only minor relevance when they were deciding the prices at which they would buy or sell. This now seems hard to believe. However, these institutions were then under the spell of academics at prestigious business schools who were preaching a newly-fashioned theory: the stock market was totally efficient, and therefore calculations of business value - and even thought, itself - were of no importance in investment activities. ( We are enormously indebted to those academics: what could be more advantageous in an intellectual contest - whether it be bridge, chess, or stock selection than to have opponents who have been taught that thinking is a waste of energy?).
Warren Buffett's 1988 Annual Shareholder Letter:
The preceding discussion about arbitrage makes a small discussion of "efficient market theory" ((EMT)) also seem relevant. This doctrine became highly fashionable - indeed, almost holy scripture in academic circles during the 1970s. Essentially, it said that analyzing stocks was useless because all public information about them was appropriately reflected in their prices. In other words, the market always knew everything. As a corollary, the professors who taught EMT said that someone throwing darts at the stock tables could select a stock portfolio having prospects just as good as one selected by the brightest, most hard-working security analyst. Amazingly, EMT was embraced not only by academics, but by many investment professionals and corporate managers as well. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day. In my opinion, the continuous 63-year arbitrage experience of Graham-Newman Corp. Buffett Partnership, and Berkshire illustrates just how foolish EMT is. (There's plenty of other evidence, also.) While at Graham-Newman, I made a study of its earnings from arbitrage during the entire 1926-1956 lifespan of the company. Unleveraged returns averaged 20% per year. Starting in 1956, I applied Ben Graham's arbitrage principles, first at Buffett Partnership and then Berkshire. Though I've not made an exact calculation, I have done enough work to know that the 1956-1988 returns averaged well over 20%. (Of course, I operated in an environment far more favorable than Ben's; he had 1929-1932 to contend with.)
The reason for preamble is I've been told that the January Effect is myth. I was told it is just a Google search away (GOOG) ( GOOGL ). Sure enough, I googled 'January Effect' and 'Myth' and on January 12, 2023, an author, writing in FORTUNE, suggested the January Effect was a myth.
Exhibit A
Another top search returned this Forbes article : (The January Effect: Fact Or Fiction? -published on January 14, 2022), which offers a more nuanced view. Enclosed below are the author's conclusions. That said, the author isn't exactly endorsing the January Effect.
The January Effect 2023 Portfolio - 29 Equally Weighted Stocks
On January 3, 2023, before the first opening bell of the New Year, I created and published a bespoke list of my top 29 favorite the January Effect 2023 stocks. As a mostly small cap value investor, I follow hundreds of stocks, at least from a far, and others very closely. Within that universe, I hand selected all 26 out of the 29 stocks. The model portfolio was equally weighted. Three out of the twenty nine were selected by a savvy member of my marketplace group, 'Scottep2'. His top three favorites were Cooper-Standard Holdings ( CPS ), Red Robin Gourmet (RRGB), and Ashford Hospitality ( AHT ). To give Scott credit where it is due, again, these were 100% his ideas and I agreed these were good candidates for inclusion on the list.
Enclosed below are the 29 stocks that made my list.
And in case you're wondering, during the month of January 2023, the bespoke and equal weighted January Effect 2023 model portfolio generated a 34.2%!!! total return, whereas the Russell 2000 ( IWM ) was up 9.8%.
I know I sure would love to hear how people can explain away this type of outperformance. Again, we are talking about an equal weighted portfolio, of 29 names. This is no easy feat to beat the index, and by such a wide margin.
In terms of the biggest drivers of overall performance, here is the ranking:
- The Gold Medal goes to DermTech, Inc. ( DMTK ): 205.1%
- The Silver Medal goes to Mesa Air Group, Inc. ( MESA ): 92.8%
- The Bronze Medal goes to Copper-Standard Holdings ( CPS ): 84.4%
- Red Robin Gourmet ( RRGB ): 60.2%
- Ashford Hospital Trust ( AHT ): 54.1%
- Rekor Systems, Inc. ( REKR ): 41.7%
- iMedia Brands ( IMBI ): 39.1%
- Vacasa Inc. ( VCSA ): 38.9%
- BARK, Inc. ( BARK ): 34.9%
- Barnes & Noble Education ( BNED ): 32%
- Yellow Corporation ( YELL ): 31.9%
- GrowGeneration ( GRWG ): 31.6%
- WW International ( WW ): 28.8%
- Lulu's Fashion ( LVLU ): 28.7%
- Advanced Emissions Solutions ( ADES ): 27.6%
- Nautilus Inc. ( NLS ): 20.9%
- Orion Group Holdings ( ORN ): 20.6%
- Alto Ingredients ( ALTO ): 17.7%
- Express Inc. ( EXPR ): 13.7%
- HyreCar, Inc. ( HYRE ): 13.6%
- Culp, Inc. ( CULP ): 13.3%
- Vroom Inc. ( VRM ): 12.7%
- Gannett, Co., Inc. ( GCI ): 12.4%
- Kirkland's, Inc. ( KIRK ): 10.9%
- The Honest Company ( HNST ): 9.6%
- Ultralife Corp. ( ULBI ): 4.7%
- 1-800-FLOWERS.COM ( FLWS ): 4.3%
- Microbot Medical ( MBOT ): 3.3%
- Kopin Corp ( KOPN ): -3.2%
Remarkably, twenty eight out of the twenty nine stocks finished the month in positive territory. Moreover, the fact that twelve out of twenty nine stocks finished up north of 30% is impressive.
My thought process when creating the list was to select low priced stocks that had been taken to the woodshed, in 2022. Given the enormous selling that occurred, throughout 2022, really, as well as during December 2022, there were so many names to choose from. However, the idea was to pick names where a value case could be made and where arguably the baby had been thrown out with the bathwater.
Putting It All Together
January 2023 was an amazing month to be long equities. The Russell 2000 was up a blistering 9.8%, during the month. Remarkably, though, my bespoke 29 equal weighted January Effect 2023 model portfolio was up 34.2%. By no means am I suggest that 29 stocks is a large enough sample size to make any declarative statements, proving or disproving anything. That said, hopefully, in mid December 2023, when thousands of people are Googling 'January Effect', I hope this article comes up near the top of the search query, as this is one point suggested that a well curated list of January Effect stocks can be a lucrative way to generate strong returns during the month of January.
Appendix:
Here is a time stamp screenshot of the original January Effect 2023 article, sent to my marketplace group, on January 3, 2023, before the opening bell.
For further details see:
January Effect 2023 Model Portfolio: +34.3% (Final Results)