The One Constant in Investing
“Investing is not a game of analysis; it’s a game of meta-analysis. It doesn’t matter what you think; it matters what you think relative to what everyone else in the market thinks.” – Dan Rasmussen, author of The Humble Investor
Eugene Fama won the Nobel Prize in Economic Sciences in 2013. His research showed that asset prices are very hard to predict in the short term. An investor would find it hard to beat the market as asset prices reflect all available information.
Fama’s research laid the foundation for the Efficient Market Hypothesis (EMH), which essentially states any mispricing’s are quickly eliminated as astute traders step in to profit.
The EMH is widely accepted on a few principles…
- Markets are competitive
- New information is reflected almost instantly in asset prices
- It’s very hard to consistently beat the market
It would be disingenuous for anyone to disagree that markets are competitive. It’s tough for the sharpest minds on Wall Street to consistently outperform.
Critics of EMH state that the market cannot be fully rational because humans are often irrational.
Here are examples when prices wildly deviated from fundamentals.
The Dot-Com Bubble (late 1990s–2000)
- Internet stocks skyrocketed with little or no earnings
- Valuations became detached from reality
Firms added “.com” to their name and saw huge price jumps. Prices were driven by narratives and excitement, not revenues or earnings growth.
The Nasdaq fell ~75% from 2000–2002.
The U.S. Housing Bubble (2000–2008)
- Home prices surged far beyond income and rent fundamentals
Price-to-rent and price-to-income ratios hit historic extremes. The delusional belief that “housing always goes up” was commonly accepted.
A massive collapse ensued; banks were holding bad loans, and the Global Financial Crisis tanked the economy and markets.
Meme Stock Mania (2020–2021)
- Stocks like GameStop and AMC surged due to retail coordination
- NFTs (JPEGs of Ape pictures) were trading for millions of dollars.
Prices disconnected from fundamentals driven by social dynamics (Reddit, short squeezes, coordinated trading).
YOLO (you only live once) and FOMO (fear of missing out) were born and became part of the speculator’s vocabulary (especially young, inexperienced investors).
The S&P 500 lost 18% in 2022. Many of the “meme” stocks and speculative NFTs lost most or all of their value.
We like to think markets are mostly efficient, but cannot be completely efficient because human beings are often irrational (especially during exuberant or crisis times).
How can the humble investor take advantage of the quirks in human psychology to make better investment decisions?
1. Know what to pay attention to
In an era where humans have cellphones strapped to their hips 24/7, information flows instantly. Humans aren’t meant to process the reams of information.
It’s nearly impossible to separate what matters from what doesn’t. If you pay attention to everything, you pay attention to nothing. It’s tough for most people to filter the signal from the noise.
Author Sahil Bloom calls it the News Paradox. “The more news you consume, the less informed you are.”
Social media is another trap. The problem with social media is the idiots are loud and cocksure, while the intelligent are uncertain and quiet.
You must understand that social media algorithms feed you more of what you consume. You’re not going to get the other side of the trade, argument, or opinion, rather more of what you already believe. This is a slippery slope and potentially dangerous feedback loop for investors.
2. Quit looking for certainty in an uncertain world
Humans have a natural tendency to crave certainty. We would rather be gaslit than admit we don’t understand how the world works. That’s why people entertain, consume, and make investment decisions based on smart-sounding market forecasts.
No one can predict the next crisis or market movement, but we can set our watch to how humans react. This cheeky quip can create a massive advantage for the humble investor.
A good rule of thumb is to shun market forecasts and understand market history instead.
My most important discovery—a finding that changed the course of my career—is that the future is far less predictable than most investors think. The best places to make money in markets are where others are too confident in their forecasts. – Dan Rasmussen, author of The Humble Investor
3. Markets are humans interacting with other humans
In the era of AI, robots, algorithmic trading, instant information, and cellphones, it’s easy to forget that markets are still very much influenced by human behavior.
Understanding human behavior and the psychology of money can create a massive advantage in the digital age.
Here are several biases that humans often exhibit…
- Emotional decisions; overreaction and underreaction
- Mixing investing and politics
- Herding behavior (crowding into a hot theme or asset class)
- Overconfidence
- Extrapolating current trends into the future
Betting against hubris (excessive optimism) or betting on pessimism has been a winning framework. The time to get more aggressive or put cash to work is when it feels the worst. The time to exercise caution and revisit risk management is when investing seems easy.
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It would seem markets are mostly efficient, with periods of inefficiency due to irrational human behavior. An investor can take advantage of market dislocations by understanding the predictable cycle of human emotion.
- A modern investor’s toolkit should include a steel trap information filter. If you pay attention to everything, you pay attention to nothing.
- Quit chasing certainty, predictions, and forecasts. The only certainty in investing is uncertainty.
- The study of human psychology, blind spots, and biases can create an investment advantage in the digital age.
We end with our favorite quote from Dan Rasmussen, author of The Humble Investor.
“Human psychology is one great constant in investing. Interest rates go up and down, stock markets boom and bust, but human psychology never changes. And I believe that studying how people think about and react to stock markets—and particularly studying the most common mistakes investors make—can give us an edge in a surprising world.”
If you struggle with making emotional investment decisions, shoot us a note at [email protected].
Written by Nik Schuurmans, CFA®
Nik Schuurmans joined Waverly Advisors in January 2026 after Pure Portfolios was acquired by Waverly Advisors, LLC. As Partner and Wealth Advisor, Nik operates using a transparent and pioneering fee structure, to provide a modern wealth management experience for every client. Nik believes access to professional advice should not come with exorbitant fees, misaligned incentives, and conflicts of interest. Learn more about Nik…
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