Markets are defying all logic. Let go of the old rules.

I was reading The Economist’s latest edition over the weekend when the Buttonwood column caught my attention. It talked about how physics has fundamental laws to explain the universe, while markets seem to operate in a world with no such order. There is no equivalent of Newton or Feynman in the field of investing. No grand unifying theory. Just people, patterns, and probabilities.

That observation stuck with me. Especially because, lately, the markets have been acting like they have torn up the old rulebook and thrown it out of the window.

When everything rises and nothing makes sense

Let’s look at what has been happening over the past few months.

• Gold prices are hovering near record highs. Traditionally, this signals fear.
• Equity markets, both in India and globally, are also near all-time highs. That is supposed to reflect optimism.
• US bond yields have been rising, usually a sign of economic strength and a trigger for the dollar to strengthen. Instead, the dollar has weakened.

In theory, none of this should happen at the same time. And yet it is. Which tells you that the theories are not working.

Finance is not physics

Financial theorists love to borrow from science. You will find equations that look like they belong in a lab. Models like the efficient market hypothesis, the capital asset pricing model or arbitrage theory have been celebrated for decades. They are taught in college classrooms, coded into spreadsheets, and quoted in investment reports.

But in practice, they fall short.

Most popular models are based on assumptions that are elegant but unrealistic: that humans are rational, risks are symmetrical and outcomes follow a bell curve (or normal distribution). But in real life, fear and greed are lopsided. Information is uneven. Feedback loops abound.

So, when markets do something strange, our instinct is to scramble for explanations: geopolitics, interest rates, quarterly earnings surprise, algorithmic trading, etc. Sometimes we are right. Mostly, we are just doing storytelling in hindsight.

What the models fail to capture is that markets are made up of people. And people change. They learn, forget, panic, copy each other and act out of fear, envy, greed or boredom. No matter how sophisticated the model, it cannot account for the irrationality of millions of investors responding to constantly shifting incentives.

That is why so many investment strategies that look brilliant on paper fall apart in the real world. There is no formula for behaviour.

Markets as moving targets

There is also a deeper, structural problem: the market adapts.

The moment a strategy becomes obvious, it stops working. The moment a pattern is noticed, it vanishes. That is because investors change their behaviour in response to what others are doing. Unlike the laws of physics, market forces evolve. They do not obey. They adapt, react and reinvent.

This is why even the most robust backtested strategies break down. What worked for 10 years might stop working for the next two. And yet, investors cling to forecasts and frameworks as if they were scientific truths.

So what should investors do?

After reading that column and mulling over the market’s recent behaviour, I decided to try the impossible: create a “theory of everything” for investing.

But the more I thought about it, the more I realised something: we don’t need a theory. What we need is a way to stay grounded when theories fail.

Here is what I have come to rely on:

• Valuation is your only defence in an uncertain world: You cannot control outcomes. But you can control what you pay. Buying quality at a reasonable price won’t protect you from short-term noise, but it will limit long-term damage.
• Diversification is humility in action: It’s a recognition that you don’t know what will work when. Don’t wait for the market to make you humble. Build your portfolio like someone who already is.
• Simplicity outlasts cleverness: The best investors I know don’t have complicated strategies. They have consistent ones. Most of their decisions are unremarkable and that is why they work.
• Time is your greatest advantage: In the short term, markets are governed by mood. In the long term, by business performance. Give your investments time to escape the noise and reflect the underlying fundamentals.

The enduring lesson

The truth is, investing is not a science with perfect rules. It is part art, part discipline, part psychology. It rewards those who are resilient, curious and willing to learn; not just from numbers but from experience (especially others’ experience).

So, the next time the markets confuse you, don’t panic. Don’t chase new narratives. Don’t look for a theory of everything. Instead, remind yourself that the absence of certainty is not a bug. It’s a feature. And that is what makes this game worth playing.

Also read: How and when to reset investments to maximise wealth

This article was originally published on June 09, 2025.