So-called "target prices" are a scam
Sell side analysts simply want to prompt trading to coin more commissions and fees.
The word “target” has meaning in the English language: “the object to be affected or achieved by an action or development”. But the word has been appropriated by sell-side analysts and brokers to pretend the trading price of a given security can be described as having a “target price” which neither means actual price, estimated value or projected financial results. It is smoke and mirrors, often justified by applying some simplistic formula combining, for example, a multiple of earnings or cash flow and an estimated net asset value (NAV), implying the particular analyst has completed a formal valuation but doesn’t want to be held accountable for the result.
Talking heads on BNN Bloomberg, typically fund managers, encourage investors to consider “target prices” in making investment decisions and interviewers on these talk shows like to chime with a “consensus” target price combining the same nonsense expanded to include the arithmetic mean of all published reviews of the particular company that include a “target price”. Rarely does the discussion provide any explanation of what action or development is contemplated or considered or why “price” is considered to be an object. Isn’t the likely object net income and the action or development items which increase or decrease anticipated net income? Why not disclose the projected net income and how the analyst arrived at the projection? Instead, there is the ubiquitous chart, often with a red hand-drawn line pointing to a higher or lower price as if the chart had some predictive value independent of the operating results of the underlying business.
The dialog has one obvious objective - encourage trading. Leave aside the reality that as a group investors who trade lose money since trading is not free and does not affect the underlying operations of the companies whose securities are traded (except in unusual circumstances often involving mergers or acquisitions). Nope, the whole spiel is like a carnival barker trying to separate a mark from more money. None of these “experts” seem likely to admit the reality that investors benefit from lower stock prices providing them the ability to buy into a future earnings stream at a lower price and enjoy a higher return on their investment. Instead, the want investors to believe that if they just choose the right securities and the “target price” is realized they can sell that holding and find a replacement at least as good as the one they sold, and that net of the costs of the transactions, management fees, commissions and taxes on any gain they will benefit. Some will, others won’t, but as a group they will be less well off - that is a certainty.
The myth that advisors improve outcomes for investors is belied by the hard evidence. The vast majority of money managers produce returns for their clients that are lower than the returns on the market indices. One hundred percent of money managers make money for advising their clients. It is a scam that transfers wealth from owners of companies to advisors, many of whom have become billionaires in the process while their clients earn less than the market averages.
Want to earn more? Take a course on valuation, buy a book on investing like Peter Lynch’s famous book “One up on Wall Street” or buy an index fund with the lowest possible MER and keep more of your money. You won’t beat the indices but you are likely to beat your old advisors. Warren Buffett bet a million dollars this approach would work and won handily.
Great article indeed! I don't bother anymore with analysts target prices.