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Tax Loss January Effect

Tax Season
Written by Andy

2022 has been a bear, with many stocks down -80%, -90%, -95% or more. At year-end, holders are often eager to lock-in tax losses and clean-up their books. So we could see some nice bounces once the selling abates. All in all, digging into tax loss names is one of my favorite year-end activities. Over time, it has been very rewarding. 2021 was an abysmal exception, as the bear market won out.

by Dominic Frisby

Just a very short note to say that we are now heading into tax-loss season (December), when numerous investors in North American markets, whether institutional or private, sell down their losers in order to realise a loss, which they can then off-set against gains elsewhere in order to reduce their tax liabilities.

The result is that stocks that have performed badly can get really beaten up. That means just about every type of resource stock outside of the energy sector is likely to see some persistent selling over the next fortnight.

It’s also an opportunity for bargain hunters.

My experience is that prices often reach their final low two on the final Friday of trading. As but as Christmas comes on a Sunday this year, that would be Friday 23rd and I rather suspect trading will have pretty much drawn to a halt by then.

I am therefore targeting the Friday 16th to Wednesday 21st December window.

Sometimes you can see a significant return in a fortnight. The selling stops and funds reposition at the beginning of the new year.

In practice, bottom fishing can prove to be very expensive and markets can continue falling for a long time. But eventually, however there will be a bottom and – having been here before I speak from experience – we should get quite a rebound afterwards, be it in resource stocks, tech or anything else, and a lot of money will be made

As I stated above the strategy does not always work. 2020-21 was one example. But sometimes it can work really well – 2015-16 springs to mind. 2013-14, 2014-15 and 2016-17 are all examples of years that it worked well.

Bear markets are a time for conserving capital. However, they are also times of preparation, thought and research. A lot of great new businesses get formed in bear markets.

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