‘Tis the Season for Tax-Loss Selling

Every year from Halloween until Christmas, whenever the market is having a bad day or a bad week, high quality stocks with good dividends should start to appear on the list of new 52-week lows. Many investors will be liquidating stocks they bought earlier in the year which have done poorly and using the losses to offset taxable gains in other stocks which have done well, and these actions will drive some stocks to new lows.

This is my favorite time of year for bottom fishing. Last year during the tax-loss selling season, I was able to acquire several big-cap blue chip stocks at outstanding prices and with great dividend yields. They have gained an average of 30% this year.

This investment practice is really just an expansion of the “Dogs of the Dow” technique beyond the Dow 30, so naturally the best place to start looking for candidates is the weekly “Current Doggishness” list at dogsofthedow.com, which shows the Dow candidates sorted in order of yield. You can have the updated list emailed to you every Saturday.

Another good place to go fishing is indexArb’s helpful list of S&P 500 stocks sorted by yield. The harvest will not include as many blue chips this year, since they have been on a tear, but something good is bound to turn up. I don’t see many high-yielding names on either list which I don’t already own. This may be a good year to look for bargains farther afield, perhaps among small and mid-cap regional banks with a lot of exposure to mortgage lending.

A friend takes exception to my use of the term “bargain” to describe investments, and he is right, since everything that can be known about a company has already been discounted by the market and is reflected in the current price. But I favor the term because my approach to buying stocks is exactly the same as my technique for grocery shopping: I buy a little of what I need and a lot of whatever they have on sale.

Bottom fishing is a high risk investment style. Even if you are very good at contrarian thinking and technical analysis, you need to remain aware that you are trying to catch a falling knife. It is important to wait for the stock to start rebounding. Even then, the investment will go against you in the short term more often than not.

But bottom fishing also offers potential high rewards. If your bottom fishing investments during the tax-loss selling season are well chosen, based on solid fundamentals and logical themes, diversified among companies and sectors, and well timed with money you can afford to lose, the odds favor significant gains on average, with the occasional grand slam.

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