Topic: Daily Advice

Why price targets can go just as wrong as any other prediction

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Investors often ask us why we don’t publish price targets for the stocks we recommend in our newsletters and investment services. After all, stock price targets commonly appear in brokerage and media reports.

There are several reasons we do not follow this practice. The main one stems from a key piece of our stock trading advice: predictions are the least reliable part of the investment decision-making process.

Price targets encourage investors to rely on predictions about stocks. But big bets on predictions or opinions will always produce inconsistent results. That’s why successful investors recognize that predictions are of limited use in investing profitably.

Instead, we continue to recommend that you focus on investment quality and diversify by following our three-part investment philosophy (more about that below).

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Stock trading advice: How price targets can cause you to miss some big gains

There’s another drawback to price targets. They can spur investors to quit buying or even sell their best picks way too early. By definition, your best picks are those that do much better than you ever expected.

To make serious profits in stock investing, you need to hang on to your best performers for years. That’s because even good stocks sometimes go sideways for decades, while others turn out to be “ten-baggers,” with gains of 1,000% or more. If you are too quick to sell stocks that have gone up, you may avoid some 20% setbacks. But you’ll also miss out on some 200% gains.

Price targets provide a rationale for selling whenever a stock you own hits the target. This generates more trading activity—and greater commissions. That helps explain the popularity of price targets in brokerage research.

Stock trading advice: How to increase your chances of finding a superstar

Instead of relying on stock-price targets, we recommend that you follow our three-pronged investment philosophy. That is, invest mainly in well-established companies; spread your money out across most, if not all, of the five main economic sectors (Manufacturing, Resources, Consumer, Finance, Utilities); and downplay stocks that are in the broker/media limelight.

That way, you protect yourself from an unforeseeable industry downturn. You also increase your chances of stumbling upon a market superstar — a stock that does much, much better than average.

Look at it this way. If it was so easy to predict share-price movements ahead of time, investing would be incredibly profitable and nobody would have to work. Of course, the universe isn’t built that way.

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