When stock markets become wild and unpredictable, most people start looking for logic behind every rise and fall. Experts on TV and social media quickly give their opinions, as if they know everything.
But the truth is, nobody really knows why the market suddenly goes up or down. In such times, it’s better to stop trying to make sense of every move and focus on staying calm with a long-term view.
Overview of Contents
The Baloney Blizzard of Market Explanations
Just about every volatility storm in the markets quickly morphs into a baloney blizzard, market strategists and a swarm of online pundits pretend to explain what just happened and concoct predictions of what will happen next.
It’s time to sharpen your critical-thinking skills. To stay the course as a long-term investor amid this short-term turbulence, you will need them.
Volatility Strikes Again
In the last fortnight, the fear gauge, the VIX index of volatility, shot up more than 50% to its highest level since the dark pandemic days of 2020.
Were the future cash flows of major large companies one-eighth less valuable on one day than the day before—and then one-tenth more valuable on next day?
Of course not. But the more implausible an event feels, the more the human mind seems to crave a plausible explanation for it.
The Danger of Believable Stories
What’s the harm in that? A believable story might lead you to think you know exactly what’s coming next and to trade on that belief, when it’s probably nothing but a delusion. Or a compelling narrative might prompt you to believe the teller saw the whole thing coming, when that wasn’t the case.
Nearly a century after the crash of 1929 and almost four decades after the crash of 1987, no one knows for sure what caused either one. But this week, markets are already abuzz with confident theories of what had happened on in the last fortnight.
Markets Don’t Have to Make Sense
You can only stretch a rubber band so far until it snaps, and when it snaps it stings. The simplest explanation of all: Markets went haywire this fortnight because markets consist of people, and crazy behavior is contagious.
To paraphrase Mark Twain, truth is stranger than fiction because fiction has to make sense. Markets don’t.
Micro-Efficient vs Macro-Inefficient
No less an authority than Paul Samuelson, the Nobel laureate in economics, who died in 2009, argued that markets are “micro-efficient” but “macro-inefficient.” By that he meant that investors are good at quickly integrating new information about individual securities
but bad at sizing up geopolitical and macroeconomic developments that can affect entire categories of assets like stock, bonds or commodities.
You can define macro-inefficiency as “long waves” of prices for broad baskets of securities “below and above…fundamental values.”
Complexity in Broader Markets
Some believe markets are micro-efficient but macro-inefficient because an individual security is discrete and affected by a fairly limited number of factors.
Broader bundles of assets like entire national stock markets can be swayed by countless forces, making their value “more subjective.” They think macro-inefficiency can unfold not just in the long waves, but in short bursts as well.
Fast-Paced Fear and Trading
There’s a narrative that big market moves are a leading indicator, and it’s a very fast-acting leading indicator. The human sympathetic nervous system evolved for us to jump to action in an emergency.
Time is sped up. People drop what they’re doing and think, ‘I’ve got to handle this.’ That urge is exactly what brokerage firms and trading apps play—and prey—on. And it is what long-term investors must be on guard against.
The Denominator Deception
Financial marketers grab and hold your attention online by playing on your emotions, especially fear and anger.
Their simplest trick is what I call hiding the denominator.
NIFTY PLUNGES MORE THAN 500 POINTS sounds scary, because it obscures the starting point of the decline. To control your fear, simply ask, “What’s the denominator?”
The Nifty’s previous close was 23837.26; that’s the denominator. The drop was 533 points; that’s the numerator. Divide the numerator by the denominator and the “plunge” becomes a 2.24% drop.
That isn’t a small decline, but it feels a lot less alarming than NIFTY PLUNGES MORE THAN 533 POINTS. Your intuition will naturally fixate on “MORE THAN 533,” because it’s so obviously a big number. By redirecting your attention to the denominator, you push yourself to do what is called “talking back to a statistic.”
No One-Size-Fits-All Reaction
Every market crisis brings out three groups: the doomsayers, the knee-jerk contrarians, and the indecisives—each with its flaws. There’s no single correct response to a crisis; actions must align with one’s cash needs, time horizon, macro views, and investment philosophy.
Thanks to today’s incessantly twitchy, infinitely networked markets, it has never been harder to be a disciplined and independent investor. Investing isn’t about mastering the markets; it’s about mastering yourself.
Learning to Talk Back to Statistics
Here’s another example of how to do that—and why it’s an important tool to keep you on course as a patient investor.
On one day, thousands of social-media accounts shared a variation of this shrieking message:
“BREAKING: Motilal Oswal says institutions bought the dip, while retail investors panic-sold aggressively.
Retail SOLD Rs10000 crore. Institutions BOUGHT Rs50000 crore.”
Let’s discover the denominator together. According to readily available data from the NSE, 113 million investors own stock either directly, or through mutual funds, exchange-traded funds or other pools of investments.
If, as the Motilal Oswal report estimated, they sold Rs10000 crore of stocks (and stock funds) all told, that’s an average of Rs885 per investor. That’s less than one-ninetieth of one percent. “Panic selling”? Are you kidding me?
Nowhere did the original Motilal Oswal report use the word “panic.” It stated simply that “retail participants were aggressive net sellers today,” with net sales of Rs10000 crore, well below the usually positive average daily net flow over the past year.
Hiding the denominator and hyping the numerator is how online commentators distort matter-of-fact observations into messages meant to instill fear.
Final Thought: Stay Calm and Think Critically
You don’t have to try to make sense of markets that make no sense. And you certainly shouldn’t listen to anyone trying to make you panic. Learning how to talk back to statistics is your first line of defense—and the best way to maintain an even keel when markets go bonkers.