Predicting the Stock Market
Investing is all about predicting the future from past data. It is not easy to do that's why most investors lose money in the market.
It is clear that an enterprising investor will look at more data and try to make more accurate predictions compared to a defensive investor. That's why it is preferable that defensive investors limit themselves to simple businesses. For example, investing in Apple $AAPL in 2016 was a great move I made as a defensive investor.
As an enterprising investor, my best prediction was, of course, GameStop $GME , on which I made 3300% profits in 2 years. How did I do it? I weighted the probabilities. GameStop was not going bankrupt as the market expected as it had more cash than debt. They were buying buyback shares and on the brink of a short squeeze. The potential reward was big compared to the risk I was taking. I invested 8% of my portfolio in GameStop. Worst case scenario, it goes to zero and I lose 8%. Best case scenario is over 1000% profits. You always need to look for asymmetric risk-reward.
Predicting the future should not be based on past data alone but rather at looking at all possible scenarios then weighting the probabilities. One also needs to discount the future as money today has more value than money in the future. That's why when estimating future cashflows, we always need to discount them at the proper rate. The larger your uncertainties, the larger your margin of safety should be. For example, investing in miners is risky as they are based on commodity prices which are volatile. I took a bug margin of safety investing in copper miner $COPPER FreePort-McMoran $FCX in 2020. I'm no longer investing in it as at current price, after taking a margin of safety, it is no longer undervalued anymore.