Target Prices Destroys Value

When managing your portfolio one important thing to consider is to limit the downside. To limit your downside is very important for your terminal wealth, and your terminal wealth is what matters. If you can limit your downside, the compounded returns will do the job for you building your terminal wealth over a longer time period. An important lesson to learn is that markets’ rebound, but stocks’ don’t always.

Now to the title of this blog post, “Target Prices Destroys Value”, what do I mean by that? Actually, I mean exactly what it says, they will destroy your value. I’ve done research on Asian markets to see how accurate analysts’ target prices are. As you probably already know, no one can foresee the future. With that in mind I would define a target price as accurate if the the target price is within the range of +/-10% of the actual price of the stock 12 months after the target price was set. Unfortunately, in Asia, only 18% of analysts’ target prices are accurate per this definition. What is even more scary is that more than half of the time analysts’ miss their target prices by more than 30%, being both overly optimistic and overly pessimistic.

In the¬†slideshare below you can find out whether analysts’ at least can predict when the market turns. My conclusive advice to YOU is to make sure to limit YOUR downside and stop relying on target prices!


2 Comments

  1. julian George on 05/28/2014 at 10:18 AM

    Good insight about TPs. I’ve always been a bit sceptical on the whole idea, but as a salesman they have their uses!
    When one thinks of the energy that is devoted to coming up with TPs one wonders if some of that had been used on other things there might be a lot more, better informed corporate research around.
    I am certain that you are right that you do need the 15% either way range as at TP can only ever be a “sighting shot”.

    • andrew25 on 06/05/2014 at 6:44 AM

      Thanks for sharing Julian and I agree. The use of target prices make it easier for the sell side analysts and brokers to cell a certain stock to their clients, and it also makes it comfortable for the client to “know what to expect”. However no one can foresee the future, trust me I’ve tried to forecast my own business many times and I am still wrong. I usually teach my students at the university “YAAW” – You Are Always Wrong. That together with the time it takes to come up with a target price (that will always be wrong, except for the times you are lucky) are some of the reasons I’ve stopped my reliance on forecasts and target prices in the research I do.

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