The Fool’s Gold

“Patterns are the fool’s gold of financial markets” Benoit Mandelbrot

In 1976, a group of economists discovered that stocks tended to do well in January, small cap stocks in particular. Small cap stocks returned 26% in January of 1975 and an 18% in January of 1976, enough to get anybody’s attention.  This came to be known as the January effect, and like many other fundamental-less anomalies, shrunk upon its discovery.

Below I’m showing how small cap stocks did in January until the time of the discovery, and from the time of the discovery until today. Between 1927 and 1976, small cap stocks returned 5.9% in January; from 1977 until today, they returned 1.9%.

From 1927-1976, small stocks beat large stocks an astounding 86% of the time; that has since shrunk to 55%, basically a coin toss.


To be fair, the 1.9% return in January since 1977 is still significantly better than the 1.1% return seen in all other months. So the January effect remains in tact, but nowhere near to the extent we saw before its discovery. As Mandelbrot says, “The trend has vanished, killed by its discovery.”


The (Mis)behavior Of Markets