Increase Your Returns by Compounding
In the past two issues of Seasonal Insights I have shown that many individual stocks display unique seasonal patterns.
There is a variety of reasons for this phenomenon. Often internal procedures are responsible, which can e.g. lead to a company's earnings being disproportionately large in a specific quarter.
That frequently results in earnings surprises in the subsequent reporting periods – and in line with this, above average price gains. The question is how to actually take the most advantage of this phenomenon.
Boost your returns by compounding
Fortunately, a sufficiently large number of shares that are entering strong seasonal trends can be found at any time of the year. That makes it possible to accumulate gains by switching into stocks that are seasonally attractive in a consistent and timely manner.
I am going to illustrate this schematically. Let us assume that stock A has a strong seasonal uptrend between January and February, generating an average return of +11%, stock B follows with a similar gain from March to April, thereafter stock C, and so on.
By switching from one stock to the next and by so to speak stringing the seasonal patterns together, these returns can be combined.
You first purchase seasonally attractive stock A, then stock B, then stock C, etc. The chart below depicts a diagram of the cumulative returns based on the above-mentioned assumption.
Diagram of cumulative seasonal returns
Compounding helps boost returns. Source: calculation & chart by author
Theoretically, by taking the compounding effect into account, the example yields a return of +87.04% per year.
Of course, in reality such regularity won't be encountered on the stock exchange. Unique seasonal patterns in individual stocks nevertheless exist and can be exploited to increase the probability of achieving profits.
The real problem consists of actually finding these stocks. For this purpose we have created sophisticated software that allows us to find, analyze and chart these seasonal patterns.
That has enabled us to overcome the specific difficulties that tend to crop up during actual implementation of such strategies.
You can now also optimize your stock market investments by exploiting favorable seasonal probabilities!
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