Why Everything You Learned About Investing Might Be Wrong

In finance classrooms across the country, students are taught a foundational tenet: markets move based on fundamentals. If a company reports strong earnings, its stock should rise; if earnings disappoint, the stock should fall. But seasoned investors know the real world is far less tidy. Stocks often plunge after stellar results or rally in the face of bad news. Why? Because markets aren’t governed by fundamentals alone—they’re shaped by expectations, positioning, liquidity, and psychology.

Markets don’t react to news in isolation; they react to how that news compares to what was anticipated. And in today’s environment, that reaction is further distorted by algorithmic trading strategies that respond to headlines, sentiment, and price momentum in milliseconds. These systems can magnify short-term moves, creating volatility that reflects not long-term value, but the interplay of perception, positioning, monetary conditions, and speed.

The Liquidity Undercurrent

Beneath the surface of market moves lies an invisible current: liquidity. Not just trading volume, but the broader availability of money and credit in the financial system. When central banks cut interest rates or inject capital through quantitative easing, liquidity expands. Risk assets tend to rise—not necessarily because fundamentals improve, but because capital is cheaper, leverage is easier, and investors are more willing to chase returns. In contrast, when liquidity tightens, markets often retreat—even strong businesses see valuations compress. Liquidity doesn’t dictate direction on its own, but it fuels the extremes. It amplifies sentiment, distorts valuations, and lengthens or shortens entire market cycles.

Sentiment Rules the Market

Finance textbooks emphasize valuations, ratios, and economic indicators—price-to-earnings multiples, GDP growth, interest rates. These tools are important, but they rest on a critical assumption: that market participants behave rationally. In reality, markets are often driven by emotion. Fear and greed routinely overpower the fundamentals.

Investors frequently pile into stocks at all-time highs—not because of improved fundamentals, but due to momentum, optimism, and the fear of missing out. During the late 1990s dot-com boom, companies with no earnings and unproven business models soared simply because others were buying. Fundamentals took a back seat to euphoria.

On the other end of the spectrum, when markets decline sharply, even companies with strong balance sheets and solid cash flows are sold off indiscriminately. Panic doesn’t distinguish between quality and risk; it simply seeks the exit.

Valuation models can tell you what something should be worth—but not when investors will care. Market timing is rarely a function of spreadsheets—it’s a function of sentiment. Bull markets tend to accelerate when skepticism fades and crowd enthusiasm takes hold. Deep corrections, meanwhile, often occur when fear overshadows logic.

Ultimately, markets aren’t just shaped by numbers—they’re shaped by narratives. Crowd psychology, shifting expectations, and emotional reflexes are as integral to market behavior as any financial metric.

Fractals: The Hidden Geometry of Market Psychology

To the casual observer, markets often appear erratic—price movements seem noisy, disconnected, and difficult to interpret. But when viewed through a wider lens, recognizable patterns begin to surface. This was the insight of Ralph Nelson Elliott in the 1930s, who observed that markets moved in recurring wave-like structures. These “Elliott Waves” weren’t just technical patterns—they were expressions of crowd psychology cycling through optimism and fear.

Decades later, mathematician Benoit Mandelbrot expanded on this idea with his work on fractals: self-similar patterns that repeat across timeframes and scales. He noted that financial markets resembled natural forms like jagged coastlines—complex, irregular, but not random. Whether you zoom into minute-by-minute movements or study multi-decade cycles, the same emotional contours reappear, reflecting the repetitive nature of human behavior.

These patterns are more than historical quirks. They are visual records of recurring sentiment—greed at market peaks, fear at the lows. From the South Sea Bubble in the 18th century to the dot-com mania of the late 1990s, markets have consistently exhibited this psychological rhythm. Speculative excess builds slowly, driven by hope and momentum, while sell-offs tend to be swift and unforgiving, fueled by uncertainty and panic.

Sophisticated investors understand that markets are shaped as much by emotion as by data. They study these recurring behavioral patterns, recognizing when sentiment has reached an extreme—whether it's complacency at the top or capitulation at the bottom. History may not repeat exactly, but it often follows familiar emotional arcs.

Viewing the market through a fractal lens doesn’t guarantee precision, but it offers structure amid volatility. It allows investors to move beyond isolated headlines and focus on the behavioral cycles that have shaped markets for centuries. In doing so, it becomes not a prediction tool, but a framework for understanding how patterns of human nature continue to drive price.

The Illusion of Narrative

In markets, price often leads the story. Stocks don’t rise because of a clear piece of positive news—they rise, and then the explanations follow. Analysts and commentators quickly assemble narratives to make the movement feel rational: earnings momentum, economic data, policy signals. But more often than not, these stories are retrospective justifications rather than real-time drivers.

Narratives are compelling because they create the illusion of order. They help investors feel grounded in a world of uncertainty, reinforcing decisions already made. But relying too heavily on post hoc explanations can be dangerous. It encourages overconfidence, masks underlying risks, and obscures the role that sentiment, positioning, and randomness play in shaping market behavior.

Understanding markets requires more than accepting tidy stories. It demands skepticism, pattern recognition, and a willingness to acknowledge the limits of what we can truly know in the moment.

How to Really Understand Markets

Successful investing goes beyond mastering financial models and valuation techniques. It requires an understanding of human behavior—both your own and that of the crowd. Markets are ultimately shaped not just by fundamentals, but by the interplay of sentiment, liquidity, positioning, and psychology.

The key is learning to recognize when emotions reach extremes—when optimism turns to euphoria, or when fear gives way to capitulation. These moments often mark turning points, not because of new information, but because investor behavior becomes stretched and unsustainable.

In the end, markets don’t move on fundamentals or narratives alone. They move based on how people feel about them—feelings that are influenced by monetary conditions, expectations, and crowd psychology. Once you begin to see through that lens, market movements start to make far more sense—and your decisions become more grounded, not in prediction, but in awareness.