Mark Twain is a famous writer perhaps best known for his book The Adventures of Huckleberry Finn. Coincidentally, Twain is also a favourite writer of investors Warren Buffett and Charlie Munger – who has been known to quote Twain liberally. One of the many great quotes attributable to Twain is the following:
October. This is one of the particularly dangerous months to invest in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.
With a number of high profile stocks including Treasury Wine Estates Ltd (ASX: TWE) and the Reject Shop Ltd (ASX: TRS) plumbing 52-week lows and the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) recently touching a 6-month low, there are probably a number of investors thinking that it might be worth taking a break in February and avoiding the market altogether!
However Twain's quote isn't really saying to avoid the market completely and here are a couple of quotes by none other than billionaire Warren Buffett himself to help explain why.
The Golden Rule
Rule one – never lose money. Rule two – never forget rule one.
The key to not losing money is understanding value. Investors often get the concept of price and value confused. Whether buying a house, a car, a chocolate bar or shares, getting ripped off and overpaying is never beneficial to your wealth. The only way to protect yourself from overpaying for anything is to know the value of what you are buying.
If you can determine value then there is little reason to not buy a bargain when you see one, no matter what month of the year it is!
Thrive on other people's uncertainty
Be fearful when others are greedy. Be greedy when others are fearful.
This oft repeated quote about fear and greed is also important for investors to take heed of – particularly during bouts of market volatility. It is quite reasonable to acknowledge that the stock market is a dangerous place, however, when others are indiscriminately selling is exactly the time to be keenly interested and looking for opportunities where price and value have diverged.
Foolish takeaway
There is no need to avoid the market in February; rather there is a need to avoid overpaying for stocks or buying very low quality stocks. A long-term investing strategy that focuses on quality and buying below intrinsic value should do well over time, no matter what month it is.
