When Do You Get off the Ship?

April 14, 2008

Feedback in:

Hi Michael! This is not a response to anything in particular. It may even qualify as a rant. The idea below keeps popping up in many settings and I don’t get it. Maybe you can explain why it makes sense or why it persists when it doesn’t. The idea is the “price target”, as in, “Sell the stock when it reaches your price target”. A common way to create a price target is to estimate what the P/E ratio should be or will be, and estimate what earnings will be. Then, multiply these two numbers to get the target price. Thus, this number is the product (both literal-mathematically and figuratively) of multiplying a guess by another guess to end up with a number that is believed to be significant and should govern your trading. So, if I have a stock that is heading up like a rocket leaving the launch pad, I’m supposed to dump it because it reached some analyst’s price target? Regards, Chuck Cain

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