NigamArora

NEW YORK (MarketWatch) — The end of the year is always a time for investors and money managers to try and make a few re-adjustments, whether it’s cutting some losers or adding to some winners, in order to make the years returns look a little bit better. Here are three ideas that might do just that.

1. Take advantage of the January effect

The January effect is a phenomenon that makes prices of certain stocks rise more in January than the market averages, making the January effect a great money-making opportunity for astute investors.

Over the last 30 years, we have made money from the January effect about 75% of the time, broken even about 10% of the time, and lost money about 15% of the time. Odds favor that the January effect will be profitable in 2014. In good years, 30%-40% returns can be generated in about three months; the point is that attempting to take advantage of the January effect is a worthwhile endeavor. Having said that, it is important to note that losses can also occur; it is not a free lunch.

The annotated chart of James River Coal US:JRCC  shows an example of how to take advantage of the January effect.

From the mid-point of the buy zone to the mid-point of the target zone shown on the chart, there is the possibility of a 145% return in about three months.

Thirty years ago, one could simply buy depressed stocks in the last week of December. Now that the phenomenon has become well-known, the time to buy is typically late November and early December.

The practical way to take advantage of the January effect is to buy dips in certain stocks that may occur for the following two reasons:

• Tax-loss selling. One strategy that is commonly employed by investors is to offset gains by taking losses on certain stocks. Such selling for tax purposes artificially depresses the price of certain stocks.
• Window dressing. Portfolio managers in their year-end reports do not want to show investors that they were holding stocks that did not do well. Therefore, they sell such stocks artificially depressing them further.

The January effect occurs for two reasons. First, investors buy stocks in January that were artificially depressed because of the aforementioned tax-loss selling or window dressing in the prior year. Second, in January, Wall Street professionals get big bonuses. Those with big bonus prefer bargain stocks and drive up the prices of the stocks that were losers the previous year.

The conventional wisdom is that this effect applies only to small stocks. My experience is that the effect is not limited to small stocks but applies to depressed stocks in general.

At The Arora Report, we advocate a basket strategy to reduce risk. We have selected 43 stocks for our subscribers that may potentially benefit from the January effect. To execute the strategy properly, it is important to take small positions in a large number of stocks.

Typically, gains are taken in the period of late January to early April.

2. Prune crowded trades from the portfolio