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Mon, Mar 04, 2002 - Page 19 News List

Kernel of truth lurking in Wall Street jokes

By John Dorfman  /  BLOOMBERG , BOSTON

They say the truth is often spoken in jest. If that's the case, I want to look at the message underlying some jokes that are part of Wall Street lore.

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

Mark Twain said this, and he would know since he lost a fortune in the stock market.

There actually is some difference among the months, however.

According to Ned Davis Research, December has historically been the best month for stocks, with the Dow Jones Industrial Average gaining an average of 18.4 percent a year. July is second best, with gains at a 16.4 percent annualized clip.

September is the worst month, with annualized losses averaging 11.9 percent. February and May also show losses on average.

The numbers are based on roughly 100 years of history, through October 2000. If you look at more recent numbers, beginning with 1982, January is the best month for stocks, followed by December. September remains the worst.

"What's the difference between being early and being wrong? There isn't any." (Anonymous).

As an investor who looks for cheap stocks and is often too early, I resent this joke. Still, there's a lot of truth in it. If you bought International Business Machines Corp. near US$40 a share in late 1985, you more than tripled your money by the end of 2001.

But you had to wait 11 years to get even. Most investors would have given up before the stock ignited.

"Buy a company any fool can manage because, eventually, one will." Credit mutual fund manager Peter Lynch with this line. I had to disagree with the person who made Fidelity's Magellan Fund a household name, but I don't think any company is fool-proof. I prefer another of Lynch's sayings (see next entry).

"If you spend 13 minutes a year on economics, you've wasted 10 minutes." This, too, comes from the lips of Peter Lynch, and it contains a great deal of wisdom. It's better to spend most of your time trying to invest in good businesses at reasonable prices, rather than trying to psych out whether the economy -- or the market -- is going up or down.

"Buy some good stock and hold it until it goes up, then sell it. If it don't go up, don't buy it." As most people know, humorist Will Rogers said this. As most people don't know, he said it two days after the stock-market crash of 1929. What amazes me is how many people believe a related theory -- that if a stock goes down, it wasn't a good stock to begin with.

"How many stockbrokers does it take to change a light bulb? Two. One to take out the bulb and drop it, the other to try and sell it before it crashes."

Well, brokers often do act quickly, if not wisely. This reminds me of another light bulb joke. How many efficient-market theorists does it take to change a light bulb? Answer: None. If the bulb needed to be changed, it would already have been done.

The efficient-market theory states that all known information is automatically and almost instantly factored into stock prices. So, the theory says, investment success is mainly a matter of luck.

"Saint Peter admits a New York stockbroker to heaven and gives him a silken robe and golden staff. Next comes a minister, who is given only a cotton robe and wooden staff. The minister demands to know why the broker got better treatment.

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