FOOL ON THE HILL: An Investment Opinion
October's Lessons

October gets a bad rap from investors, thanks to the added stock market volatility that comes with it every year. However, there is something else about the month that makes it unique besides falling share prices. October is often the best time of the year to gain a free financial education, if you open your mind to it.

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By Brian Graney (TMF Panic)
October 24, 2000

All of you investors who have been holding your collective breath these past four weeks can get ready to finally exhale. In just a few short days, the miserable, warped, and -- by most appearances -- cursed month of October will soon be behind us.

What is it about the 10th month of the year that stirs such fear and dread in U.S. equity investors year after year? It's as if the Stock Market Gods take the onset of fall a bit too literally and decide that descending leaves should also portend to descending stock prices. Last year, it was Greenspan and inflation worries that stirred up trouble. The year before that, it was the awful, drawn-out "Asian contagion." And of course, there are the ill-fated Octobers of such long-ago years as 1987 and 1929. But let's not even go there.

This year, it's largely jitters about third- and fourth-quarter corporate earnings that are torpedoing stock prices. If you're an investor, this means you can probably skip the opening of Book of Shadows: Blair Witch 2 this weekend. In all likelihood, you've already had your fill of scary stuff this month, with the Dow down 4% and the Nasdaq off 3% since the end of September.

A month like no other
In the grand scheme of things, October is just another month, yet another page in the phone book-sized calendar of the long-term investor. Still, why does this annual go-around of heightened volatility and frenetic stock trading get to us so much? Why is it that in these early autumn days, otherwise calm individual investors can suffer through nearly daily bouts of nail-biting and doubt, and in some extreme cases even start to entertain thoughts about chucking the whole notion of long-term, self-directed stock picking altogether?

I dunno. Maybe it has something to do with global warming.

But if you can get past the fact that October tends to be a rather bumpy stock market month, this time of year can actually be viewed as one of the best periods for an investor. That's right, October is really a good time to be an investor. This is especially the case if you think of investing as a lifelong learning process, rather than as simply a series of staggered buy and sell decisions. It all depends on your viewpoint.

If you only care about stock prices and whether they are rising and falling on this day or that, then October should rightly be feared. Frankly, it's no coincidence that what has historically been the stock market's most volatile month also happens to be the month during which most mutual funds close the books on their accounting years. Those two observations go hand-in-hand. With the Investment Company Institute indicating that asset turnover for the average stock mutual fund reached a startling 41.5% for the 12-month period ending in July, fund managers are really under the short-term performance gun these days. The threat of impending investor defections is prompting activity by all kinds of institutions right now. Call it tax-loss selling or whatever you want. The upshot has been greater volatility and regular market distortions this month.

An opportunity to learn
If anything, the added October volatility creates opportunities for long-term investors. This is not an attempt to rub anyone's face in their losses if their portfolio has slipped into the red over the past few weeks. The opportunities I'm thinking of are not of the "If you liked it at $60 per share, you should love it at $30 per share!" variety, although there may in fact be plenty of those. Rather, the month's dependable volatility has a way of shaking loose some of the underlying stories in the market and magnifying them over the course of just a few short weeks. In this way, thoughtful investors get a yearly chance to learn about themselves and some of the broader themes of the market as the rocky month unfolds in front of their eyes.

In October 1998 for instance, investors received a free primer in risk management through the failure of the Long-Term Capital Management (LTCM) hedge fund. In truth, the unfortunately named fund actually blew up in late September, but that's beside the point. The aftershocks of the failure were felt well into October, when the nitty-gritty details of the implosion were still being dug out by reporters and the financial fallout was sending stock prices this way and that.

Individual investors at the time learned a number of important lessons from the LTCM debacle, not the least of which was how quickly the market can be sent to the verge of an outright panic. In terms of a personal investment lesson, the LTCM meltdown was a reminder of the dangers of leverage and the limitations of so-called black-box investment strategies. These two concepts relate directly to the individual investor's world. At its core, LTCM itself is a rather remarkable case study of the duel hazards of relying way too heavily on excess margin and adopting an inflexible investing framework that is based on past events rather than future probabilities.

This October, the ongoing dot-com-uppance of scores of former high-flying Internet stocks has been the major theme for investors to ponder. The most recent issue of Fortune centers on the "Dot-Com Crash," with several articles written largely in the same "what can we learn from this" style reserved for LTCM two years ago. Similar Net stock postmortems have shown up in other financial publications this month as well. Some of these articles are early attempts at drawing conclusions from the dot-com craze, while still others (including one right here at the Fool) are intended to probe for possible survivors left amid the rubble. All of them aim to get investors' minds churning about what has happened in the past year, and that's largely a good thing.

Raking it in
In any case, the general attention given to the current season -- as well as the individual portfolio pain that stems from its inherent volatility -- is orienting investors' minds on broader issues, such as speculative frenzy and sustainable businesses in today's New Economy. From an educational perspective at least, the experience will ultimately prove useful somehow, even if it merely prepares an investor for the tumult that is bound to re-occur next October. As one Fool writer put it amid a past volatile autumn, "We still live in a world where no one gets a financial education unless they actively seek it out." The frenzied month of October is often the time of year when a financial education will come to you -- if you let it.