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Investing: The Mark Twain way! - Views on News from Equitymaster
 
 
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  • Jan 9, 2006

    Investing: The Mark Twain way!

    In the world of finance, the Mark Twain effect is the phenomenon, observed in some markets, of stock returns in October being generally lower than in other months. Now, we have tried and calculated month-on-month Sensex returns for October each year starting October 1990. Phew! October had been a positive month on only four occasions in this 16 year period - 1991, 2001, 2003 and 2004. Well, the name comes from the following quote of Mark Twain, the popular American humorist, novelist, writer and lecturer:

    OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The other are July, January, September, April, November, May, March, June, December, August, and February.

    But why to read this quote when we are well past October and are cruising through another month of strong gains in the Indian markets in January? Well, the quote holds true even if one were to substitute October with January and vice versa. All months of the year are dangerous for investing, if you ardently follow these 'principles':

    1. Sincerely relying on the 'hot' tip or the 'next' story from a friend/relative/broker.
    2. Not doing own research on the investment target (the company/stock)
    3. Investing for the short term
    4. Always giving heed to the above three principles

    Instead of this, pick a stock that matches your risk-return profile and not the one of your broker and research well about the company's history, its business model and factors that will affect its future performance. Also, have a long-term (2 to 3 years) investment horizon. Following these mantras will not only help you realise adequate returns on your investments, but they will also help you rest in peace!

    Finally, as Twain wittingly said, "There are two times in a man's life when he should not speculate. One, when he can't afford it and two, when he can." Well, the graph on the right shows that there are two months in a year when a man (or a woman) should not speculate - March and October! For your reference, these are the months that have shown the largest number of declines in our study of the BSE-Sensex since 1990. For other months, be cautious!

     

     

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