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Part 3
Why Set Price Targets?
Let’s recap. We have learned the following so far:
- What price targets are and why they matter
- How to use price targets to drive your overall strategy
- How to calculate price targets
- The challenges of calculating price targets
Price targets can be a helpful tool to use along with other market metrics to bolster returns. They can also be helpful in identifying entry and exit points. If your stock is trading above its fair value, then maybe it is time to at least consider cutting exposure. Conversely, if it is trading below what you’ve calculated to be its fair value, then perhaps adding exposure might be the way to go.
But like many other things in the market, it’s not a perfect science.
You can run your models 10,000 times over and account for everything that could change. Yet, it is entirely possible that your price target will end up being way off. There’s always going to be that one thing that no one saw coming, as no one has a crystal ball. Just ask the Nobel Laureates at Long-Term Capital Management.
Perhaps the most important question that probably comes to mind is why analysts keep coming up with price targets even when they turn out to be wrong?
That’s because the entire basis of investing is to forecast where markets are headed to make the most money, not go there after everybody is already in. And if you find an analyst who has gotten more than their share of predictions right, it makes sense to listen to what they have to say.
What helps separate top-notch strategists from the bottom feeders are those who are willing to evolve their forecasts as the market evolves.
The lesson here is to stay dynamic.
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