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Mondays Are the Worst Days to Buy Shares

In investing circles, there’s a curious phenomenon known as the Weekend Effect, or the Monday Effect. In 1981, finance researchers Michael Gibbons and Patrick Hess published a research paper titled “Day of the Week Effects and Asset Returns” that showed how stock market returns tend to be significantly lower on Mondays (returns on Mondays are negative, in fact) as compared to any other day of the week.

Are Mondays really the worst day to buy shares? Interestingly, over the past 10 Mondays, the Straits Times Index (SGX: ^STI) has ended with a daily loss a total of only five times.

Where has the Monday Effect showed up?

This phenomenon has apparently been observed not just in the US stock market but also in other international markets such as Japan. There are a few possible reasons that others have proposed for this: 1) Stock market trading is not done on weekends and so, negative news released over the weekend are all absorbed together on Monday; 2) many companies release their earnings results on Friday, so, a poor showing might result in a larger impact on trading results on Monday.

My personal Foolish take

To be honest, I have only heard of this effect a couple of weeks ago even though my past time over the last decade has been reading about investing and the stock market.

It seems to me that this might be a case of a confirmation bias whereby researchers already have some form of belief and went specifically looking for data that confirms their view points. And to be clear, it’s not a criticism of anyone – this can happen to the best of us.

Furthermore, in modern times like these when we are drowning in data, it’s easy to find spurious correlations between seemingly unrelated phenomena. As a hypothetical example, data mining might unearth some ‘relationship’ between the performance of Singapore’s share market with the number of days it rains in Beijing, China. But, if there is no strong causation for the phenomenon, we can’t count on it to work again in the future. The ‘Monday’ effect might just be a less-extreme example of finding correlations instead of causations.

Foolish Takeover

When investing, it might be better to spend our time understanding businesses in an effort to value their shares. After all, I do know of many successful value investors but have yet to meet a successful “Monday Effect Trader”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.