Patterns in Chaos?

At any given point of time and in the immediate future, all markets – stocks, bonds, currencies, commodity, etc. – are chaotic. Seeing patterns amid this chaos and believing that you can develop formulas and strategies for the profitable exploitation of these patterns is a surefire way of losing money. This illusion of order is what attracts a whole bunch of people – day traders, positional traders, technical analysts, chartists, etc. like bees to a honey pot. All are seeking a pattern, a formula from the past so that they can apply it in the future and make pots of money.

The truth is that at any given moment of time, the world of money is a world of pattern-less disorder and utter chaos. Patterns seem to appear in it from time to time, as do patterns in a cloudy sky or in the waves of an ocean, but they are momentary. Alluringly they fool people in trying to make sense out of them and seduce them in devoting precious time and money demystifying them and discerning that formula, which will make them rich!

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The formula they all seek is perceived from the past. This is based on the age-old but unwarranted belief that history repeats itself. People who hold this belief, and a majority of them do, believe that the orderly repetition of history allows accurate forecasting in certain situations. Say sometime in the past, Situation X and Situation Y had happened together and it was followed by Event A. And now if similar circumstances prevail i.e. Situation X and Y are happening, Event A is bound to follow. Right? Beware! That’s the trap.

Stock and bond market analysts will go back to the last time there was a bull market and collect great baskets of facts on everything that was happening around that time. They will observe that GDP was rising, market P/E multiples were at historic lows, the ruling party was winning state elections, the FII flows were just round the corner, films were bombing in theaters, weddings were becoming more lavish and the Indian cricket team was faltering. They will wait until the same configuration of circumstances comes together again and when this happens, shout from the rooftops “Everything is in place! A new bull market is on its way!”

Maybe it is and maybe it isn’t. It’s true that history repeats itself sometimes, but more often than not, it doesn’t, and in any case, it never does so in a reliable enough way that you can prudently bet money on it. This illusion of order is dangerous for your wealth and has the propensity to wipe you out.

This trap is laid regularly when stock market chartists (people who believe that past price movements have a bearing on the future) draw those wonderful graphs starkly visualizing their illusion of order. They focus their attention on a stock and painfully chart out the ups and downs in the company’s stock prices. They study the results looking intently at the jiggles and wiggles that occurred before the stock drove through the roof or crashed like a sinking stone. They believe that these patterns will repeat itself and the next time they see a similar set of jiggles and wiggles, they will conclude that its action time and recommend the appropriate speculative action.

They do this unceasingly and sometimes they are correct, often not. If you can’t forecast right, forecast often. When they are often proven wrong, they will humbly blame themselves. But they won’t believe the simplest of all explanations that the markets have no pattern. It almost never repeats itself and certainly never in a way that can be reliably predicted. A wise and seasoned investor should recognize chaos for what it is and refrain from trying to make some sense out of it.

Milan Sangani

Milan is a veteran stock market investor and educator on equity investing. Connect with him on