Why “Sell in May and Go Away” Is Advice You May Regret
Berkshire Hathaway‘s (NYSE:BRK.A) first-quarter results weren’t nearly as interesting as the news that Greg Abel will be the next CEO. Verizon (NYSE:VZ) sells AOL and Yahoo to Apollo Global Management for 50% less than what they paid. In this episode of MarketFoolery, host Chris Hill and analyst Jason Moser examine those stories and share a few thoughts on the old investing adage: “Sell in May and go away.”
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This video was recorded on May 3, 2021.
Chris Hill: It’s Monday, May 3rd. Welcome to MarketFoolery. I’m Chris Hill, with me today, Jason Moser. Great to see you.
Jason Moser: Happy May.
Hill: Happy May. We have good news for market timers and we have immediate deal to discuss, but we’re going to start today with Mr. Buffett. Berkshire Hathaway’s operating income in the first quarter rose 20%. They bought back $6.5 billion worth of stock. Berkshire’s cash on the balance sheet grew and now stands at $145 billion. All of that, Jason, took a back seat to comments that were made at the annual meeting over the weekend, which is that Vice Chairman Greg Abel, who runs all of the non-insurance operations at Berkshire Hathaway, is going to succeed Warren Buffett as CEO. For those who missed it, this was not a formal announcement by the company. This happened during the Q&A when there was a question about how big Berkshire Hathaway has become because of the sprawling nature of all these different operations, and how is that more difficult to keep a handle on? Charlie Munger responded by saying, Greg will keep the culture. [laughs] Like basically, when Warren and I are gone, Greg is going to keep the culture. It was like, oh, well, I guess that’s that then.
Moser: Do you think Charlie under his breath was like, damn it, I didn’t mean to say that?
Hill: I think Warren, under his breath, would have said, damn it, Charlie, why did you say that?
Moser: We’ve been talking about this. It seems like every year for this meeting, it’s just kind of that question of like, who is the name? I mean, in hindsight. God it seems like it was so obvious. Just the name alone. He’s quite able to handle the challenge. We should’ve guessed, I guess we should’ve known what I’m saying. But it is a little bit of a surprise because I think a lot of folks thought that Ajit Jain might be the name that ultimately would’ve been occupying that CEO’s suite, but it sounds like it’s going to be Greg Abel. Charlie wants to know the business better than anyone, and I think it sounds like it would be a team effort, no question. But it is nice to get that certainty.
Now, all of a sudden, you have an idea of who they feel like is going to be able to keep this company going in the direction it’s headed. I think it’s a testament to their feelings on where the company is today and where they feel like it has the opportunity to go in the coming years because there’s been obviously a lot of criticism recently, particularly with Warren and Charlie being the old guys get off my lawn, old-school investing and you guys aren’t nearly as relevant anymore. They seem to think that what they’re doing is still working and they’ve got a team in place of help, to keep steering that ship in the same direction. Frankly, I think that’s the right call.
Hill: I think it’s the right call as well. I didn’t realize that Greg Abel is 10 years younger than Ajit Jain. Obviously, both of them are significantly younger than Buffett and Munger. But I do wonder, I’m not saying it’s the deciding factor, but it’s certainly if you’ve been running Berkshire Hathaway for as long as Buffett and Munger have, then whoever is going to succeed you want them to have as long run as possible.
Moser: Yeah. I appreciate that. You want to set yourself up for success. You don’t have to worry about this problem again for a long time and it sounds like that will be the case. I think when you look at Mr. Jain versus Mr. Abel, I was reading something earlier in the Wall Street Journal on this. It describes the differences between the two in what they do and how they think and what they’re focused on. With regard to the business itself. Mr. Jain, who oversees the insurance business is not written 10-K, he’s focused mainly on keeping up on the insurance industry and analyzing the insurance side of the business, which is obviously a big part of Berkshire Hathaway, but it’s not all of it.
There are plenty of other aspects of the business and that’s where I feel like maybe Abel is the better person for this job because of the fact that he spent so much of his time focused on the bigger picture it seems not just insurance, but really focused on the competitive threats that are out there that Berkshire Hathaway is facing. Not just from an insurance perspective, but from a sort of conglomerate perspective. This is a big business, there are a lot of different things. It sounds like Abel is a bit more focused on that big picture landscape and that I think probably benefits the company and then the bonus there is it keeps Ajit Jain in place doing something that he is really good at. We had a long track record of Mr. Jain’s performance there and what he’s been doing for the insurance side of that business. I think it really just keeps two people in place doing what they do really well. That it sounds like is more or less your modern day Charlie and Warren tandem, they’re running the business focused on, obviously, more than just made into the portfolios, but they’re really focused on running the business at large.
Hill: You’re going to be digging into this on Industry Focus later today. We will move on from Berkshire Hathaway, but definitely for folks who are looking for more on Berkshire Hathaway because there is a lot of stuff that we don’t have time to get to. Checkout Industry Focus later today.
In 2015, Verizon bought AOL for $4.4 billion. In 2017, Verizon bought Yahoo! for $4.5 billion. All of those properties became Oath, an unfortunate name that [laughs] wiser heads prevailed, and then it was rebranded Verizon Media Group, and today, Verizon is selling its Media group to Apollo Global Management for $5 billion, which is less than the $8.9 billion.
Moser: Yeah, I guess it is, isn’t it?
Hill: When I saw this story this morning, one of my thoughts was, “Oh, that’s right. Verizon owns [laughs] both of those media groups.” There are a couple of things we can get into here, but one of them, Jason, is, this is just from a basic strategy standpoint, this is Verizon very clearly sending the signal, “Hey, we tried this media thing for a while and it’s not working for us. We know that some of our competitors are still doing this, but we are getting out of this game.”
Moser: Yeah. It’s funny, this is a perfect segue, I think, because the quote that stands out to me in regard to this story is one from none other than Charlie Munger. When he said, and I quote, “Acknowledging what you don’t know is the dawning of wisdom.” That’s something we like to bandy about a good bet on the investing team in some way, shape, or form. It’s like, listen, man, understand what you don’t understand, know what you don’t know, don’t get in over your head. Time and time again, people businesses, we all do it, it’s human nature. We do it, and we look back, and we regret it. Hopefully, we learn from it and we move forward. I think this is going to be one of those situations for Verizon, looks back, they realize, we tried something, it wasn’t really in our wheelhouse, we didn’t really know what we were getting into fully, because in hindsight, if you look at the competitive landscape now when it comes to AdTech and Media, how in the world you think you could be going up against some of those incumbents? It’s just like a landline and mobile operator, it’s beyond me. I’m sure they’re probably telling themselves that now. But hey, better late than never.
I think to your point, the amount of money that was invested in this part of the business in Verizon Media, formerly known as Oath, I don’t want to say it was a dying business, but it was a shrinking one. If you look at 2019, Verizon Media revenues were $7.5 billion, 2020 they were $7 billion. I think you could argue that that was a pretty good year when they chalked up at $7 billion. It was continuing to get worse. When you couple the competitive landscape with these operators, specifically Verizon and AT&T, and to an extent, T-Mobile, they have to invest a ton of money right now into this 5G rollout. Spectrum bid alone is really costing these companies a lot of money to put some numbers around that.
Recently, the FCC, the Federal Communications Commission, announced that there was an $81 billion auction for that 5G mid-band spectrum. The initial estimates would be around $20-$30 billion. It came in at $81 billion. Verizon was the big spender of that $81 billion, they bid almost $46 billion on that 5G spectrum. They, I think a while back decided, “Hey, let’s focus on what we know and what we need to do,” because when you weigh out the priorities with 5G and the subsequent Gs to come are far more important than them trying to build some kind of an AdTech business based on dwindling media properties. Clearly, they’re going to have a lot of obligations here over the coming years in building this infrastructure out and coming up with the capital to pay for it all. Focusing on this Verizon Media side of the business just seems like it was a waste of time and it was becoming a waste of money, unloading it makes perfect sense. Like I said, better late than never.
Hill: In the early days of the Internet, it’s almost hard to overstate how popular and dominant these two consumer businesses were.
Moser: It is amazing.
Hill: AOL’s market cap at one point was more than $200 billion, [laughs] Yahoo!’s was over $100 billion. The fact that this combined entity at one point valued at $300 million is being sold off for $5 billion. I think it is among other things, a nice reminder for us as investors. Just always check in because there were people, and by people, I’ll just name one, David Gardner. David Gardner did so well investing in AOL back when it was the first American alive. I think that might have been the first recommendation he made in the old Fool portfolio back in the mid ’90s. Again, these were businesses that had tremendous runs. But competition is forever and businesses that can’t stay ahead of the competition end up like this.
Moser: Yeah. It’s a great reminder too, content is really difficult. On an ongoing and sustainable basis, it’s just really difficult because you’ve always got, like you said, competition is forever. You have a million in one channel out there now and pretty much, you are going to be able to find whatever you want at the click of a mouse. I don’t frequent Yahoo! all that often. I will say the Yahoo! of today is markedly different from the Yahoo! of seven, eight years ago. I don’t mean to come down too hard on it, but really frankly, to me, Yahoo! at this point just seems like a glorified version of the national acquirer. I don’t know the last time I went Yahoo! was. But every once in a while, you just end up there and I’m looking through these. It seems like it’s just catering to the lowest common denominator. If you’re doing that, you’re making a bet, you’re saying, “Okay, this is what we’re going to do,” but that comes with consequences. It’s not surprising to me to see brands like Yahoo! on the way out because when you look at what they’re doing today, it’s not terribly meaningful, it seems to be very clickbait driven. I’m sure that was partly by design. When you’re developing an ad business, you’re trying to figure out how to get as many clicks as possible. Eventually though, people really, they’re going to come and go based on what you’re putting out there. We’ve seen these two behemoths have been competed right out of their respective marketplaces, I think.
Hill: Happy first trading day in May for all your market timers out there. This is [laughs] the day where the old adage sell in May and go away gets troughed out. Every year, I just shake my head at this, that there are people, some of them are presumably serious people who take this to heart and this is their strategy for investing.
Moser: For whatever reason, those little one liners get a lot of attention. It sounds almost like you’re hearing it straight from Troy McClure on The Simpsons. [laughs] It’s just like, “Seriously? Why?” I guess it’s just the going wisdom is that from May through October where you’ve got your bankers taken vacations and there’s no real buying going on, so people just sell and then they go off for the summer and do their thing until they come back for the fall. Maybe there’s something to that, but at least the numbers would tell you that it might pay to stay invested. There was some very interesting data that I found from LTL Research and FactSet that looks back to 2011. If you go back to 2011, the 10 years that follow, from 2011 through 2020, of those 10 years, if you look at the window from May through October, or maybe it’s May to October, I’m sorry, but if you sell in May and go away, in those 10 years, only two of those years were returns actually negative. The other eight, those returns were positive.
Let’s think about 2020. At the time, in March and April, it felt like the world for investors was coming to an end because there was this precipitous bear market that hit us. No one would have ever thought, based on the research that we have done, that it would recover so quickly, and yet here we are. Can you imagine not being invested between May and October of last year? Can you imagine not buying stocks during that time? Because I guess I can imagine it but I choose not to because I’m really glad that we didn’t sell in May and go away because the returns last year for that window were 12.3%. To me, that sounds like a time where you actually want to be invested. There’s clear data that says you probably shouldn’t sell in May and go away. I think maybe, we alter this, we change it around a little bit and say, instead of selling in May and going away, maybe just don’t sell anything, and if you’re really tied, then just don’t buy anything, if you really feel that strongly about it. Because the problem with selling is once you do that, you’re hitting the reset button. You’re foregoing all of the benefits that you’ve gained from being a long term shareholder, the compounding, the growth, the gains. You couple that with potential tax liabilities that may exist. It seems like there are more reasons to not sell than there are to sell.
Hill: Yeah. I’m glad you’ve mentioned taxes because that’s another part of this that I just can’t get my head around. Part of my investing strategy involves choosing to pay higher taxes. Why?
Moser: Yeah. Exactly. I mean it’s one of those things that’s always going to exist. You have to consider it. I mean if you’re working with an account that’s tax-exempt, I read something, you don’t worry about that. But still just look back at the actual data. Again, of those 10 years, two were negative, and of those two, I will say, 2011, the return in that window was a negative 8.1%. But the other negative return, it was negative 0.3%, so it was essentially flat. I mean we’re rounding that up to flat, Chris. The numbers tell you you should probably not sell in May go away. Inevitably some people will do it. We’re just going to spend the next few months, hopefully Chris telling people why they shouldn’t.
Hill: Jason Moser, great talking to you. Thanks for being here.
Moser: Thank you.
Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.