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Robert Stephens, CFA
Robert Stephens, CFA
Articles (370) 

Howard Marks on Trying to Predict the Stock Market’s Future

Seeking to forecast the performance of your holdings may not be a productive move

April 28, 2020

Attempting to accurately predict the short-term movements of the stock market has always been a near-impossible task. There are a wide range of variables that can cause unexpected price movements in either direction.

Given the uncertain outlook facing the economy currently, forecasting the stock market’s performance is likely to be even more challenging. Therefore, following Oaktree Capital chairman Howard Marks (Trades, Portfolio)’ advice to buy attractive stocks for the long run and largely ignore short-term price movements could be good idea.

Investor sentiment

One of the difficulties in trying to predict the short-term performance of the stock market is that it is highly dependent on investor sentiment. For example, during periods of strong economic growth, bullish investors can contribute to stock prices rising to record levels. During bear markets, however, stock prices can sink to extreme lows due to investors flocking to less risky assets.

The importance of investor sentiment in determining stock prices is highlighted by Marks:

“Market fluctuations of this magnitude aren’t nearly fully explained by the changing fortunes of companies, industries or economies. They’re largely attributable to the mood swings of investors.”

By reacting to changing investor sentiment, rather than seeking to predict it, you can take advantage of low valuations during downturns to buy appealing companies when they offer wide margins of safety.

Listening to your peers

In addition to avoiding the temptation to try and predict the stock market’s movements, it could be a good idea to ignore the forecasts of your peers. Even if they have deep knowledge of a specific sector or the wider economy, they may be unsuccessful in accurately forecasting how stock prices will perform in future.

According to Marks, most economic forecasts do not provide a significant amount of value to investors:

“Most economic forecasts are just extrapolations. Extrapolations are usually correct but not valuable. Unconventional forecasts of significant deviation from trend would be very valuable if they were correct, but usually they aren’t. Thus, most forecasts of deviation from trend are incorrect and also not valuable.”

By focusing on the quality of the stocks you hold, in terms of their financial standing and economic moats, you may be able to use your time more efficiently compared to following economic forecasts.

History repeating itself

Trying to predict the stock market’s future performance may not be a productive use of your time, but its future may include events that are similar to those it has experienced in the past.

For example, it has operated in cycles throughout history. The catalysts for its bull markets and bear markets may be unique when they occur, but the stock market’s track record of recovering from its lows to produce new highs is likely to continue in the long run.

Marks takes the view that rather than trying to predict the future, investors should use history to decide on the likely performance of the index over the long run:

“Superior investors are people who have a better sense for what tickets are in the bowl, and thus for whether it’s worth participating in the lottery. In other words, while superior investors — like everyone else — don’t know exactly what the future holds, they do have an above-average understanding of future tendencies.”

Long-term growth

The long-term growth potential of the stock market means that buying quality stocks at low prices could be the most effective means of generating high returns, according to Marks:

“In my 47 full calendar years in the investment business, starting with 1970, the annual returns on the S&P 500 have swung from plus 37% to minus 37%. Averaging out good years and bad years, the long-run return is usually stated as 10% or so.”

Stock prices are very likely to fluctuate in the future, but adopting a buy-and-hold strategy can yield higher returns relative to other assets.

It may not produce significant profits in the short run since investor sentiment and economic growth can be negative over the near term. However, the most logical use of your time is likely to be spent in unearthing the best value opportunities available, rather than trying to predict the future movements of the stock market.

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