RealMoney draws a wide audience that consists of investors, as well as readers with more of a day-trading mentality.
For about 18 months, I got up in the middle of the night (literally) to write the “Day Ahead” column for the site. In addition to a roundup of market updates and earnings reports, I would also include news about the daily analyst upgrades and downgrades. The crowning glory (I use the term sarcastically) of an analyst action is the change in price target.
Even when I was teaching people how to trade growth stocks, I never understood why individual investors and traders gave the idea of a price target any credence. It’s something the analysts at brokerages do to get attention for their research and institutional sales.
It’s true that some institutions take profits at a certain target, but the effect of any pullback is generally short-lived. Sadly, this is just one more example of individuals getting caught in Wall Street’s trap.
Here’s a passage from Andy Kessler’s excellent book, “Wall Street Meat,” in which the author details his years as a Wall Street analyst.
“For some reason, Morgan Stanley was into price targets. I hated them. To me, they were pure marketing fluff. I would recommend Intel at, say, $25. The first question I would get is “what is my price target.” My answer would be $40 for no particularly good reason. It was high enough to interest investors, but I was guaranteed to be wrong. If it hit $38, it was a great call, but I was wrong. If it went to $60, it was an even better call, but I was still wrong.
What usually happened was that if the stock hit $35, I was asked to adjust my price target to $50, so that the sales force would have a call to go out with. This was how you got target creep, an ever-upward bias on numbers so calls could be made. It would come back to bite Wall Street by the end of the decade.”
What is an individual supposed to do when and if a stock hits one of these mythical targets? Bail out, with no attention to the trend or the market cycle? What are you supposed to do if the stock just meanders along, or – gasp! – declines while you are waiting for it to reach some magical number?
Actually, those are not even the right questions. Here is the right question: If you are obsessively watching the prices and targets of individual stocks, why?
If you are invested in a globally diversified, balanced portfolio, you won’t have to worry about fictitious price targets for individual stocks. Instead of playing along with Wall Street’s silly little game, just concentrate on building your own wealth.
After all, those analysts aren’t thinking of you when they set those targets. They are thinking of their own career.
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