24 March 2023

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Don’t make predictions

Luigi Campopiano

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Peter Lynch is one of America's top investors with a background in mutual fund management. He is also a philanthropist and is famous for his frank language and his strong opinions, such as the one about the uselessness of relying on forecasts for the financial markets. It’s a bit ironic, since he is the author of one of the most apt forecasts of all the time.

In a 1994 speech, Lynch said:

"Some events will happen in a completely unexpected way and the market will go down or up. There will be volatility. The markets will always have ups and downs... Corporate profits have grown historically about 8% per year. This means that these profits have doubled on average every nine years. The stock market should double every nine years. So I think the market, which today is about 3,800 or 3,700 points, will move 3,800 points upwards in the future. The next 500 points or the next 600 points, I don't know which direction they will be. But the market will double in the next eight to nine years. And they will double again in the following eight to nine years. Profits will go up by 8% per year and actions will follow. That's all that matters."

The "market" to which he was referring is the Dow Jones Industrial index. At the time of his speech, it was at almost 3,800 points. Based on his calculations, the market should reach a value of about 31,600 points. For him to make this prediction almost 30 years ago, it is quite accurate.

Lynch certainly didn't intend to make a prediction about where the U.S. stock market would be at the beginning of 2022. The great investor wanted to emphasize the growth trend that the markets have overall while also recognizing that in the short term, there is volatility that does its job well. 

Lynch's speech is not so much a forecast on the Dow Jones, but offer instead three critical elements for any investor:

The most destabilizing events are the unexpected ones — e.g., the COVID-19 pandemic, war between Russia and Ukraine — that people don’t always talk about. The more sudden and shocking events there are, the greater the volatility while the markets digest the development of events.

Investing in the stock market aims for long-term growth, but this does not mean that there will not be obstacles along the way. History teaches us that the odds are in our favor when we bet on the ingenuity and human progress that the stock market represents, but even ingenuity and progress encounter obstacles that are difficult to overcome. In the stock market, crashes are normal. Also, one of the most bullish indices in the world, the S&P 500, periodically goes through double-digit declines, even in the most positive years.

The stock market rises along with, and thanks to, the increase in corporate profits. A person invests in a company because there is a belief that that company will make a lot of money with its products or services traded in the global economy. Yardeni Research has shown over the years the earnings per share of the companies of the S&P index 500 and how they grew strongly. The stock market is made up of companies, products, services, sales, purchases and profits, just like the real economy. For this reason, it remains the most profitable investment overall. 

Read more about Lynch in this article from Forbes.