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Robert Stephens, CFA
Robert Stephens, CFA
Articles (371) 

Benjamin Graham on Trying to Predict the Stock Market’s Future

The future is an unknown that cannot be accurately forecasted

May 26, 2020

Trying to predict the future performance of the stock market is impossible. There is an extensive list of variables that cannot be accurately estimated but which nevertheless have a large impact on how stock prices perform. Yet, many investors seek to guess the returns available across the stock market over even a short time period.

The father of value investing, Benjamin Graham, did not try to predict the stock markets future. Instead, he sought to obtain a margin of safety when buying stocks and aimed to capitalize on the volatile views of his peers to generate high returns over the long run. Adopting that strategy could be a key reason why he enjoyed a highly successful investing career.

A margin of safety

Instead of trying to predict the future performance of the stock market, seeking a margin of safety when buying stocks could be a more productive use of your time.

At the moment, the stock market faces a highly uncertain future. Unemployment has soared in recent months, while consumer and business confidence could take time to improve.

Therefore, it may be prudent to demand a wider margin of safety than would normally be the case. This could protect your portfolio against a fall in stock prices in the short run, as well as provide greater scope for capital growth over the long run as the economy recovers.

As Benjamin Graham once said, "The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.

An optimistic outlook

The stock market has experienced 14 bear markets since World War II. At times, it has lost over 50% of its value in a matter of weeks. However, it has delivered an annualized return of around 10% over the past 70 years. This highlights that a bullish long-term view which utilizes a buy-and-hold strategy at its core could deliver high returns even with periodic disruption from eras of weak economic performance.

Benjamin Graham highlighted the importance of having an optimistic view of the stock markets long-term prospects in "The Intelligent Investor," writing, "To be an investor you must be a believer in a better tomorrow.

Capitalizing on price inaccuracy

Capitalizing on the inaccuracy of stock market predictions made by other investors may enable you to access attractive buying opportunities.

Benjamin Graham highlighted the effectiveness of a strategy that focuses on buying stocks when other investors are downbeat about their outlooks, saying, "Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic.

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