4 mid-cap companies to beat the October sharemarket effect forever

If you’re new to investing, it can be a very unnerving time to buy shares in your first company. Especially when you can read news headlines such as:

Bourse falls as blue chips see red,

Australian market set to plunge, or

Markets suffer largest one-day loss in nine months

American financial history shows too that:

  • The Bankers’ Panic of 1907 resulted in a fall in the market of almost 50% from the prior year’s peak
  • The Stock Market Crash of 1929 caused the Dow to fall by 25% in a week, and
  • Black Monday of 1987 witnessed a 25% wipe-out in one day

Each of these events occurred in the month of October.

More recently too, the Global Financial Crisis back in 2008-09 caused Australian markets in October to fall by more than 16%.

If you’re reading this in the month of October then, you could think that now is not a good time to invest.

Well, before you reach that conclusion, here’s a summary of each ‘October’ in the Australian market since 1993 represented today by the S&P/ASX 200:

1 October 31 October Gain/loss (%)
1993 1928.8 2070.6 7.35
1994 1967.7 1980.9 0.67
1995 2091.3 2029.7 (2.95)
1996 2214.9 2286.2 3.22
1997 2716.7 2415.0 (11.11)
1998 2491.9 2563.0 2.85
1999 2848.8 2821.4 (0.96)
2000 3298.8 3254.6 (1.34)
2001 3098.9 3249.6 4.86
2002 2987.2 3042.9 1.86
2003 3159.2 3272.0 3.57
2004 3659.6 3778.6 3.25
2005 4641.2 4459.7 (3.91)
2006 5154.1 5384.4 4.47
2007 6563.7 6754.1 2.90
2008 4794.6 4018.0 (16.20)
2009 4701.1 4643.2 (1.23)
2010 4579.2 4661.6 1.80
2011 4008.6 4298.1 7.22
2012 4388.6 4517.0 2.93
2013 5206.8 5425.5 4.20
2014 5334.1 5526.6 3.61
2015 5112.1 5239.4 2.49
2016 5435.9 5430.3 (0.10) *

* up to 21 October. Source: Yahoo Finance.

So what?

Between 1 July 1993 and 21 October 2016, I’ve observed that:

  • October in each of the last 24 years has delivered a negative return eight times. The month of October therefore has been positive for investors two thirds of the time over the last near-quarter century
  • The highest October gain was 7.35% (in 1993) and the biggest October loss was -16.2% (in 2008)
  • The compound annual growth rate (CAGR) of the sharemarket (inclusive of dividends) since 1 July 1993 has been approximately 9%
  • The Australian Consumer Price Index (CPI) and Average Weekly Ordinary Times Earnings (AWOTE) were 2.25% and 4.11% respectively over the same period
  • If you had invested in the market at the worst possible time (in hindsight) on 30 June 2008, you would be sitting on a CAGR today, inclusive of dividends, of approximately 4.4% (CPI and AWOTE respectively were 1.22% and 3.5% over the same period).

Now what?

If you can convince yourself to invest for the long-term then you can safely forget about basing your decision to buy depending on which month we’re in.

It’s also a fact that even if you were to buy shares at a time that looks absolutely catastrophic in hindsight, by holding on to your shares for a number of years you should still earn yourself a return above the cost of living and wages growth.

But that looks to be the worst case for the market as a whole.

What about particular stocks?

How about BHP Billiton Limited (ASX: BHP), Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) since 1 July 1993?

BHP, a company with good assets but with its fair share of mediocre management, has nevertheless managed to eke out a CAGR of 11.06%. Woolworths and Wesfarmers each earned shareholders CAGR of 13.74% and 15.20% respectively.

That’s $10,000 1993 dollars today worth $111,642, $193,199 and $259,064 respectively.

Foolish takeaway

You should obviously attempt to buy shares at the cheapest price possible, but this should always be based on a rational assessment of the company’s prospects at the time, and not what time of the year it is.

You should also be cognisant of the fact that both Woolworths and Wesfarmers were smaller and less mature companies back in 1993. Even BHP was too when compared to the giant it is today.

My take on all of this is that investing in the shares of listed companies is a very good way to grow your wealth over the long term (which means more than five years).

Even if your timing is terrible, you should still be able to come out ahead of inflation and wages growth therefore allowing you to grow your wealth in real terms … as long as you remain an investor.

If you’re investing today, I’d go for the smaller and less mature companies of 2016 which may turn out to be the fat, giants of the Australian market in the future … but which have already made you a fortune.

Companies such as Challenger Ltd (ASX: CGF), Altium Limited  (ASX: ALU), Freedom Foods Group Ltd (ASX: FNP), or Technology One (ASX: TNE) fit the bill in terms of potential, and hopefully your future returns will mimic the shareholder returns of the BHPs and Woolworths of yesteryear.

Don’t be put off by frightening headlines or what time of the year it is. If you’re new to the sharemarket, buy your first parcel today, add to your positions over time, and whatever you do, remain a life-long investor.

Your future self will thank you for it.

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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