One of those Septembers

Historically, September sticks out as a noticeably poor month in the stock market. In fact, it is the only month that has yielded a negative return on average since 1926. This September is likely to reinforce that statistic. The current slide in the stock market may have more to do with unusual events than with seasonality, but then again it may not. The credit crisis has been unfolding for over a year and it is quite possible that an already weak market was pushed into distress by seasonal weakness. In other words, it did not necessarily have to come as a surprise that stock and credit markets would be pushed to their limits in September.

To trade or to invest

Different factors affect stock prices in the short run and the long run. In the short run, recent and imminent developments as well as investor psychology matter most. In the long run, however, the fundamental viability of a business matters more as the intrinsic value of a business is realized in the market sooner or later. In the words of Benjamin Graham, known as the father of value investing: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

Graham and his disciples, the most famous of whom is Warren Buffett, choose to focus on the long term by finding stocks that are underpriced relative to their intrinsic value. For Buffett and many others, this has worked very well. Of course, many have also done well by focusing on shorter term price movements in the markets. While this is frowned upon by some value investors and not always feasible for casual investors, people who are serious about their involvement in the markets have all the options at their finger tips. They only need to think clearly about their time horizons.