I recently came across ‘pareidolia’, a word I hadn’t encountered before. Pareidolia is defined as the human tendency to perceive meaningful images—often faces—in random or ambiguous visual patterns, like seeing animals in clouds or what looks like Uncle Jeremy’s face in a toasted teacake.
Our brains search for order and patterns almost as much as kids seek out tomato ketchup. We add significance to shapes that appear in a few random dots, coincidences, or a vaguely familiar story that obviously must “mean something”.
The unbelievably complex creation that is the human brain has been described as a librarian of facts, stories, and figures. But at times it shows a more playful, colourful side and manages to find fun in amongst mundane surroundings.
Clouds are never just clouds. They are piggy banks, crying babies, teapots. Sometimes, they are your old boss, somehow. Think Rorschach test with all its ink spots, ambiguous shapes and drawing meaningful conclusions. Does it really uncover the real personality hiding behind your eyes or simply let loose your inner child.
Taking this creativity a little further, things happen that trigger the theorist within. How often have you randomly thought of someone you haven’t met up with for ages, and they text or phone you soon afterward. Your brain connects these events which happen exactly at 12 noon and Tah Dah you have a pattern that feels credible. Random old friends will contact you at 12 noon on a regular basis from now on. Really? I don’t think so.
Coincidence? Possibly. Destiny? Obviously.
One of the brain’s favourite hobbies is teasing us. It is after all a closet jester finding shapes, faces, and patterns where none exist.
Two circles and a line? Screams face.
Three dots on a wall? Guess what? Face.
A slightly uneven potato? Yep, face, with attitude.
Give us enough information and we will create a story. This is why stock market charts look like emotional journeys, and people read deep meaning into song lyrics often written at 3 a.m. by someone slightly the worse for wear who just broke up with their childhood sweetheart, and later that day can’t remember the words.
Let’s be honest, patterns provide a degree of comfort. They suggest a sense of order, control, that someone—anyone—understands and has a plan and knows the ending.
Randomness feels wild, rebellious, out of control, and boorish. We reconcile these feelings by explaining that “Everything happens for a reason”. Possibly, but that doesn’t help explain potholes, lemon Jaffa cakes, or Scotland’s world cup record!
Is it possible that this fascination with patterns is the birthplace of superstition? You may have a pair of lucky socks that mean you win every golf game, or get upgraded on planes. Superstitions are just patterns wearing ‘stop me and buy one’ badges shaped like shamrocks. There to protect you from the thought that fate may just put you off balance. So, you wear the same outfit to every important event because one time it got you the job, raise, possibly even partner. You avoid saying things out loud “just in case.” You knock on wood even though you do not believe in magic but also do not want to find out you’re wrong.
Perhaps the most impressive pattern humans detect is intentionality—especially their own. We remember the singular time it worked, forget the ten times something didn’t work and then announce we had a system all along.
Human beings need a story, especially when we’re trying to understand something we haven’t already classified. And so, we see faces in clouds, in toasted muffins, and the moon.
Back in 1970 Eugene Fama, a professor at the University of Chicago Booth School of Business, authored a paper reviewing theoretical and empirical research which asserts that there are no patterns in stock market prices that can be predicted with any accuracy or consistency. Fama went on to be awarded the Nobel Prize for economic sciences, and is recognised as the “father of modern finance.” It would be much more helpful if there were observable patterns. Making money in the markets would be so much easier.
Investing is easy. There are tens of thousands of investments to choose from. Picking the right ones is the tricky bit. Having a scientifically robust process provides a way of investing by managing risk, cost, and behaviours that swing the odds in your favour potentially leading to a more successful outcome.
Our investment philosophy is built on science, research that never rests but continues to explore all the new academic papers- of which there are many made across the globe. To date no new processes or investing principles have emerged that disprove Fama’s original research. Our investment philosophy is based on the collective finding of Fama and other academics such as Ken French, Robert Merton, and Robert Novy-Marx. Their research on market returns are based on his decades of study that continues today. They cover all the highs and lows investors have experienced since the great depression in 1929 through to 1939 right up to the present day. They are pervasive, showing up in all the global markets, not just the US. No crystal balls, no speculation, just data telling its own compelling story.
I’m sure it’s possible to see shapes in the clouds that look like something familiar. But there is no consistent, inescapable proof that patterns or shapes exist in market prices. We’ll just have to make do with a bull and a bear for now.