Last Updated on April 22, 2026 by teamtfl
“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
A client once asked me: “If the market went up strongly last three years in a row, doesn’t that make it more likely to keep going up?” It is a completely intuitive question. And it is completely wrong.
Markets, like many natural processes, have a Markov-like quality: their future direction does not depend on the sequence of past returns. What happened last year does not determine what happens this year. The next move is largely independent of the recent path.
Understanding this – really internalising it – changes how you invest.
⚡ Quick Answer
A Markov process is one where the next state depends only on the current state, not on the history of how you got there. Stock markets exhibit Markov-like behaviour – past returns do not reliably predict future returns. This has three practical implications: past outperformance does not mean a fund will continue outperforming, recent crashes do not make further crashes more likely, and strategies built on past patterns have weak predictive value. What matters is current valuation and your own financial situation, not the sequence of recent market moves.
What the Markov Process Actually Means
In mathematics, a Markov process is a sequence where the probability of the next state depends only on the current state – not on the history of states that led here. A game of snakes and ladders is a Markov process: your next position depends only on where you are now and the roll of the dice, not on how you got to your current position.
A card game like blackjack is not a Markov process: the value of the remaining cards depends on which cards have already been played. Skilled card counters exploit this memory-dependence to gain an edge.
The question for investors: is the stock market more like snakes and ladders, or more like blackjack?
The evidence, accumulated over decades of financial research, leans heavily toward snakes and ladders for short to medium time horizons. Recent price movements – last week’s fall, last year’s rally – contain very little predictive information about what comes next. The market does not “remember” where it has been in a way that reliably shapes where it goes.
Why This Matters for Everyday Investing
Three good years do not guarantee a fourth. Between 2021 and 2024, Indian mid-cap and small-cap funds delivered extraordinary returns. Many investors increased their allocation to these funds specifically because of the recent track record. When mid-caps corrected 25-30% in late 2024, the same investors were shocked. But past returns provided almost no predictive value about future returns in either direction. The Markov logic says: the sequence of good years does not increase the probability of the next year being good.
Recent crashes do not make further crashes more likely. The inverse error is equally common. After the 2020 crash, many investors stayed out of the market, waiting for the “next fall” that would predictably follow. It did not come at the timing or magnitude they expected – and they missed two years of recovery returns. The recent crash does not increase the probability of the next crash. The market largely does not operate on that kind of memory.
Fund selection based on recent returns is unreliable. This is the most common practical consequence of ignoring Markov logic. A mutual fund that topped the performance charts in 2022-23 will attract large inflows in 2023-24. But that recent performance tells you almost nothing about 2024-25 performance. Style cycles, sectoral shifts, and mean reversion mean that yesterday’s top performers often underperform in subsequent periods.
What Actually Has Predictive Value
If recent returns have weak predictive value, what does matter? Valuation has some predictive power over 5-10 year horizons – markets that are extremely expensive historically deliver lower subsequent returns, and vice versa. Fund manager consistency and process quality matters more than recent performance. Asset allocation relative to your own financial situation and time horizon matters enormously. These are slow, boring inputs. They are not suitable for market timing. But they are the inputs that actually matter.
The patient investor who stays invested through Markov uncertainty – neither chasing last year’s winners nor fleeing last year’s losers – systematically outperforms the investor who tries to decode patterns that are not there.
The Practical Investment Implication
The Markov insight supports a few core investment principles that sound simple but are genuinely hard to follow:
Asset allocation should be based on your financial goals, time horizon, and risk tolerance – not on recent market performance. If 60% equity was the right allocation for your situation six months ago, and the market has fallen 20%, the case for rebalancing back toward 60% equity is actually stronger now, not weaker. The recent fall does not predict a further fall.
Fund selection should prioritise consistency, process, and manager tenure – not recent return rankings. A fund in the third quartile this year that has a 10-year track record of consistent risk-adjusted returns is often a better choice than a first-quartile fund whose recent outperformance is driven by a sectoral bet that has run its course.
SIPs work precisely because they do not try to time the market. Each investment is made regardless of recent performance – which is consistent with the Markov insight that recent performance is not a reliable signal about what comes next.
Read: Why You Should Stop Believing in Market Predictions
The market does not know – or care – what it did last year. Neither should your investment strategy.
Invest for where you are going. Not for where the market has been.
A good retirement plan does not depend on market prediction. It is built to work regardless of what the market does next.
RetireWise builds plans based on your goals, your time horizon, and realistic return assumptions – not on recent market trends or fund performance charts.
Your Turn
Have you ever changed your investment allocation based on recent market performance – and how did it work out? The Markov insight is easier to understand than to follow. What helps you stay disciplined? Share in the comments.