Find order in the markets by looking beyond the chaos

Posted by TEBI on September 20, 2024

Find order in the markets by looking beyond the chaos

 

 

It’s human nature to strive to decipher ambiguity and complexity. For our early ancestors, recognizing patterns and making sense of the world around them was crucial for survival, and we retain those instincts today. The financial markets are a prime example. We want to understand what’s going on, and, crucially, predict what’s going to happen. But anyone who’s ever watched CNBC during periods of market volatility will know, even the so-called experts struggle to do it.

In fact, over the centuries, some of the brightest minds have tried and failed. Even Isaac Newton managed to lose around a third of his wealth in the South Sea Bubble in 1720. “I can calculate the motion of heavenly bodies,” he is reported to have said, “but not the madness of people.”

It wasn’t until 1900 that Louis Bachelier, a much lesser-known mathematician than Newton, published a thesis that helped to shape our understanding of how markets work. Even then, his contribution wasn’t even recognised until the 1950s.

 

Short-term market movements are random

It was while studying at the Sorbonne in Paris that Bachelier’s interest in the markets developed. Bachelier spent time closely observing proceedings at the Bourse in the Palais Brongniart and was struck by how prices seemed to move in a random manner. This observation led him to question whether there could be a mathematical framework to describe these erratic fluctuations.

The key concept Bachelier grasped was that markets are competitive, with a buyer and seller for every trade. When more people want to buy, the price goes up; when more people want to sell, it goes down. The problem is, there are all sorts of factors that affect investor sentiment — the economy, for example, wars, elections, technological changes and even the weather.

READ THE FULL ARTICLE HERE

 

PREVIOUSLY ON TEBI

Are AI-themed ETFs good investments?

Have Japanese equities turned a corner?

Are passive investors more disciplined

 

FIND AN ADVISER

The evidence is clear that you are far more likely to achieve your financial goals if you use an adviser and have a financial plan.

That’s why we offer a service called Find an Adviser.

Wherever they are in the world, we will put TEBI readers in contact with an adviser in their area (or at least in their country) whom we know personally, who shares our evidence-based investment philosophy and who we feel is best able to help them. If we don’t know of anyone suitable we will say.

We’re charging advisers a small fee for each successful referral, but you will pay no more than you would if you contacted the adviser directly.

Need help? Click here.

 

© The Evidence-Based Investor MMXXIV

 

 

 

 

 

 

 

 

How can tebi help you?