Can you time the market? Is investing different from gambling? And why do we make our worst decisions when things get scary?
In the final part of this four-part series, Ana and economist Evan Lucas explore those questions, starting with why the market isn’t the economy. They discuss behavioural biases including loss aversion, herding, gambler’s fallacy and sunk costs, before finishing with the one thing you can control: your own behaviour.
The market is not the economy
The economy and the share market are two different things.
A market is made up of individual companies, each trying to improve its business and maximise shareholder value. That can happen independently of the broader economy.
Take Australia. Banks are heavily exposed to property, so a slowdown in property lending can affect their business and profits. But that doesn’t mean every company is experiencing the same thing. Oil companies can be heading in one direction while retailers move in another.
Business cycles and economic cycles aren’t necessarily the same. A company can change its fortunes through decisions such as raising equity to fund an acquisition or responding to economic conditions more effectively than its competitors. That’s why the market can sometimes appear disconnected from economic news.
Markets can get it wrong, too
There’s another reason the market and the economy don’t always move together: markets are made up of investors, and investors don’t always get it right.
Evan points to Covid as a striking example. When the pandemic hit, markets initially plunged as investors feared the economic fallout. But once it became clear that some businesses weren’t going to be as badly affected as expected, the market rebounded quickly.
Markets are also constantly looking ahead. Investors are buying and selling based on what they think a company will be worth in the future, rather than simply what’s happening today.
So when the market seems to be ignoring the economic news, it isn’t necessarily broken. Investors may be pricing in something they expect to happen next, or they may simply have got it wrong.
Can you actually time the market?
Evan is blunt: trying to pick the exact top or bottom of the market is essentially a fluke. You might guess correctly that you’re buying at the peak or selling at the low, but knowing that in advance is another matter. People have predicted crashes and booms for years, yet neither camp consistently gets it right.
Markets price in what investors think companies will be worth in the future. Evan explains that they effectively look about 12 months ahead, based on forecasts of what businesses might earn.
The problem is that nobody knows exactly what the next 12 months will bring. There’s a big difference between buying an investment for its expected return over five or 10 years and buying or selling because you think you’ve identified an exact turning point. The first is long-term investing, while the second is market timing.
Remember what you actually own
It’s easy to think of investing as numbers moving around on a screen. But Evan says it’s worth zooming in on what’s actually underneath those numbers.
When you buy a share, you’re buying into a business. If you buy an ETF, you’re getting exposure to a collection of businesses. Those companies have employees, customers, products, costs and revenue. Their boards and management teams are ultimately trying to improve the business and maximise shareholder value.
That’s an important distinction when markets get noisy. The price on your screen might be moving every second, but underneath it is a real business trying to make money and grow.
Is investing just gambling?
It’s a reasonable question, particularly when markets are volatile.
Evan’s distinction is that investing has something underlying it. When you buy shares, you’re buying into a business producing goods or services, employing people and trying to make money. You’re backing it to create value and deliver shareholder returns. On the other hand, gambling involves risking money on an outcome without an underlying productive asset.
Evan uses Warren Buffett‘s comparison between gold and arable land. Gold can have a market price, but it doesn’t produce anything. Arable land can grow food and generate income.
That doesn’t make investing risk-free, or guarantee every business will succeed. You’re still judging what an asset might be worth in the future. But there is something underneath the investment that you’re backing.
Loss aversion: why the red numbers are hard to ignore
Evan discusses loss aversion, a concept associated with psychologist Daniel Kahneman, whose work showed how differently people respond to gains and losses even when the maths is similar.
He gives an example involving a guaranteed $900 gain versus a gamble that could produce $1,000 but also leave you with nothing. Then he flips the scenario: would you take a guaranteed $900 loss, or gamble on losing $1,000 with a 10% chance of losing nothing? The maths may point towards one answer, but emotionally, the second scenario feels very different.
The same instinct appears in investing. When you look at your shares portfolio, your eyes may go straight to the investments in the red, even if the portfolio overall is still in the green. You can end up obsessing over the losing investment rather than looking at the portfolio as a whole.
The important thing isn’t pretending you don’t have that instinct, but recognising that you do.
Herding, recency bias and gambler’s fallacy
Loss aversion isn’t the only behavioural trap.
There’s herding: following what everyone else is doing. Should you buy the latest IPO? Have you missed the AI boom? What about crypto? If everyone seems to be making money, it’s easy to assume you should too.
Evan points to GameStop as an extreme example. Investors piled into the stock as the frenzy took hold, with huge gains followed by dramatic losses for many people.
Then there’s recency bias – assuming that because something has just happened, it’s likely to continue. And there’s gambler’s fallacy, where we assume a run of events means the opposite outcome must be coming. In investing, that can become the belief that an asset that has fallen must be “due” for a rebound.
These biases can feel like rational analysis, but they’re often our brains trying to find patterns in uncertainty.
The sunk cost trap and the Concorde fallacy
The sunk cost fallacy is continuing to invest time, money or effort because you’ve already put so much into something.
Evan refers to this as the Concorde fallacy, named after the supersonic aircraft project backed by the British and French governments. The project never made financial sense, but enormous amounts of money and political capital had already been committed. Rather than walking away, the governments continued investing.
It’s easy to do the same with our investments: I’ve already put so much money into this, I have to keep going until I get it back. But money already lost is gone. The more useful question is what you would do with the money from this point forward.
If you wouldn’t buy the investment today, owning it already shouldn’t necessarily be the reason you keep holding it. That’s difficult when money, time and emotion are involved – which is why these biases are so powerful.
The one thing you can control
This is where Evan brings the whole series together. Economic cycles happen, business cycles happen, and markets go through cycles, too. You can’t control any of them.
What you can control is how you respond. That means understanding why you’re investing, what you’re trying to achieve and what you’re actually invested in, rather than chasing whatever happens to be going up or trying to predict exactly what happens next.
As Evan puts it, controlling what you can control is probably the answer to everything they’ve discussed throughout the series. That doesn’t mean ignoring what’s happening around you, but separating what you can influence from what you can’t and not letting every market wobble change your investment thesis.
Listen to this episode in full here. You can also follow us at @getrichslowclub, and reach out to @tashinvests and @anakresina on Instagram with anything you’d like us to explore next.
Happy investing!
Tash and Ana
