Investors often ask us why we don’t give price targets for the stocks we recommend. After all, stock price targets appear regularly in brokerage and media reports. There are several very good reasons we do not follow this practice. The main one stems from one of the stock investing tips we have often reiterated: 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 about the future 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). [ofie_ad]
When price targets cost investors big gains
There’s another drawback to price targets. They can spur investors to stop buying or even to sell their best picks far 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.
The best way to happen on a superstar stock
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 happening upon a market superstar—a stock that does much, much better than average. If it was easy to predict share-price movements ahead of time, investing would be incredibly profitable and nobody would have to work. But of course the universe isn’t built that way. COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members When you invest in a stock, do you ever have a price target in your own mind that you would like to see it reach? Do you let that target guide your thinking about holding or selling the stock? Let us know what you think.
