While markets often crash, they’re never crashing

Authored by

Owen A. Lamont, Ph.D.

Senior Vice President, Portfolio Manager, Research

Multiple choice question for you. Suppose you are the CEO of an investment firm. The CIO bursts into your office and yells “the stock market is crashing!” How should you respond?

  1. Buy stocks.
  2. Sell stocks.
  3. Severely reprimand the CIO.

I’d suggest choice 3, since the CIO has demonstrated a poor grasp of basic financial principles. At all times in financial markets, but especially in times of chaos and stress, you’re fighting a battle against confusion. When you say, “the market is crashing,” then you’ve already lost the battle; confusion has won. You need to get your verb tenses right:

  • Wrong: “The market is crashing.”
  • Right: “The market has crashed.”

I know it sounds silly, but words matter, even if you are only talking to yourself. When you say, “the market is crashing,” you’ve framed the situation to suggest that you can predict future prices. You can’t. When you say, “the market has crashed,” you’ve framed the situation more accurately. Something has already occurred, and you must deal with the aftermath.

This incorrect framing is perhaps more pernicious on the upside. That is, if I say, “stock ABC is soaring,” that sounds like you should buy it immediately. But if I more accurately say, “stock ABC has soared,” that sounds like you’ve already missed the boat. As Ken French recently said on the Meb Faber podcast, getting the verb tense right is critical.[1]

This error is part of the explanation for what I call the Iron Law of Return-Chasing Flows: Money chases trailing returns. Indeed, the very word “return” is misunderstood by naïve investors. They know that high return is good. But they don’t distinguish between realized return (a backward-looking concept) and expected return (a forward-looking concept). In a world with time-varying expected returns, realized returns and expected returns are negatively correlated, just as bond prices and interest rates are negatively correlated. Expected returns are what investors should chase, but instead they chase realized returns.

Journalists constantly get it wrong. Let’s take one frequent offender, Barron’s. In one week in July 2025, three different Barron’s headlines claimed that a particular stock “is soaring.”[2] Absolute nonsense.

Suppose your stableboy yells, “the horses are leaving the barn!” That’s a completely different scenario than if he yells “the horses have left the barn!” If the horses are leaving, then the optimal response is to close the barn door. If the horses have left, then the barn now contains zero horses, in which case closing the barn door is ineffective at best and counterproductive at worst since it will prevent the horses from returning.

You should never hire a stableboy who is incapable of understanding that horses that have left are different from horses that are leaving. And you should never hire an asset manager who is incapable of understanding that prices that have gone up are different than prices that are going up.

Any asset that is long-lived and freely tradable is generally going to be priced in a forward-looking manner such that future price moves are nearly unpredictable. That’s the wisdom of the efficient market hypothesis and the random walk theory. Notice that I said “nearly” and not “completely” unpredictable; “nearly” gives some scope for profitable investment strategies to exist.

Now, there are some freely tradeable objects that are not long-lived, and in this case future price changes can be predictable. For example, if electricity cannot be stored, and the demand for electricity falls at night, then we can say at sundown that the spot price of electricity is falling. Similarly, if the Fed announces that it intends to ease, it might be kosher to say that the Fed funds rate is falling. But it would not be kosher to say that the 10-year yield is falling, although according to Shue, Townsend, and Wang (2024), investors are frequently confused on this point.

There are also some long-lived assets that are not freely tradable. In many stock markets, prices are only allowed to move X% per day, and thus future price moves are to some extent predictable, although this predictability does not create an exploitable profit opportunity.

Figure 1 shows an example. BGI Genomics had an IPO on the Shenzhen Stock Exchange on July 14, 2017.[3] At the time, most stock prices in mainland China were not allowed to change more than 10% in a single day. As a consequence, for the next 18 consecutive trading days, the price of BGI Genomics rose exactly 10% a day, the maximum allowable increase.

Figure 1: BGI Genomics Stock Price

Trading days, July 14 – Aug 31, 2017

Figure 1: BGI Genomics Stock Price

Source: Acadian. For illustrative purposes only.

The initial period in July shows a world in which prices are predictable and not set by forward-looking market forces. Here, it would be acceptable to say, “the price of BGI Genomics is rising.” The subsequent period shows the world we usually face: prices fluctuate all over the place, and we can never say at any one instant what is happening.

Bill Clinton once pondered “what the meaning of the word ‘is’ is.” In a world of forward-looking asset prices, we don’t need to resolve this question, because we shouldn’t be using the I-word. We can say “the price of ABC has soared” or “the price of ABC may soar further.” But “is” is never right.

Now, you may think that I’m being pedantic. Why quibble about verb tenses when the market is crashing? That was my initial reaction when, on April 14, 2000, I went into the faculty lunchroom at the University of Chicago and excitedly told Gene Fama that “NASDAQ is crashing” (by the end of that day, NASDAQ was down 9%). He responded by communicating his displeasure at my verb tense.

At the time, I was thinking, “man, why is this old guy hassling me about verb tenses?”[4] But in retrospect, he was right. We must resist the temptation to overestimate our knowledge about the world.

On soft summer evenings in Maine, the fields are full of fireflies. As far as I can tell, the fireflies move randomly through the air in a sort of Brownian motion. Since they only light up at intervals, it’s hard for a human observer to track any individual firefly or predict its trajectory. And that’s the situation we face in asset markets. We are peering into a darkness that is illuminated only by brief flashes of data. We must acknowledge the limits of our vision.


Endnotes

[1] The Meb Faber Show, April 19, 2024.

[2] “This Tech Stock Is Soaring After Takeover Deal. How It Changes the AI Picture,” Barron’s, July 9, 2025. “Intel Stock Is Soaring. Analysts Don’t Know Why.,” Barron’s, July 8, 2025. “AES Stock Jumps 16%. Why the AI Data Center Play Is Soaring.,” Barron’s, July 7, 2025.

[3] References to this and other companies should not be interpreted as recommendations to buy or sell specific securities. Acadian and/or the author of this post may hold positions in one or more securities associated with these companies.

[4] In 2000, Fama was 61 years old; I am currently 59.

References

Shue, Kelly, Richard Townsend, and Chen Wang. "Categorical Thinking About Interest Rates." (2024).

About the Author

Owen Lamont Acadian Asset Management

Owen A. Lamont, Ph.D.

Senior Vice President, Portfolio Manager, Research
Owen joined the Acadian investment team in 2023. In addition to more than 20 years of experience in asset management as a researcher and portfolio manager, Owen has been a member of the faculty at Harvard University, Princeton University, The University of Chicago Graduate School of Business, and Yale School of Management. His professional and academic focus is behavioral finance, and he has published papers on short selling, stock returns, and investor behavior in leading academic journals, and he has testified before the U.S. House of Representatives and the U.S. Senate. Owen earned a Ph.D. in economics from the Massachusetts Institute of Technology and a B.A. in economics and government from Oberlin College.