How Accurate Are Analyst Price Targets?

Analyst targets in theory can streamline a lot of trade decisions. Target price is higher than the current price? BUY! Oh, if only it was that easy.

A 2012 study of 11,000 analysts from 41 countries found target accuracy to be fairly low. 18% for 3-month and 12% for 12-month price targets.

There are a number of reasons for the low success-rate.

1) Targets are based on point-in-time information. Predictions get stale fast when information changes - this happens often.

2) Conflict of interest is a concern. Analyst who have a vested interest in a stock might be bias. If you owned Tesla, you might be swayed to give a generous target.

3) There's no standard for how price targets are achieved. Every analyst has their own models and methods. Results can vary wildly.

4) There's no accountability. Analyst can be completely off and simply revise their target. No sweat off their backs.

5) Markets are volatile, especially in the short-term. They can swing for no reason. Markets are made up of us unpredictable beings. No matter how much data you have, it's hard to know what we're thinking.

6) And most importantly, no one can predict the future.

It's understood amongst professionals that targets aren't truth. They're simply a signal. A way to sense how Wall Street is feeling about a stock. It's an interesting data point but not something you trust at face value. Next time you see an opportune price target, think twice before diving in.

Comments

Today's Special: Humble Pie

You champion a project, fight for an idea, and then...reality sets in. That churning in your stomach isn't butterflies, it's the realization you've missed the mark. Pride will puff up your chest, and kick in the "defend at all costs" instinct. But arguing with the umpire never changed a call. Admitting you're wrong isn't a sign of weakness. It can strengthen your professional standing. In a world obsessed with the illusion of infallibility, the courage to adjust course is a breath of fresh air. It shows you're confident enough to be wrong, and adaptable enough to learn from it. Do your research, think critically, and stand behind your decisions. But when the data whispers (or screams) otherwise, don't be afraid to swallow that slice of humble pie. Be the first to acknowledge. Don't wait for someone to point out your mistake. Be open, take responsibility, and most importantly, focus on what you're going to do to address it. Don't dwell ...

The Art of Giving Feedback

Constructive feedback is an awkward affair. You don't want hurt feelings, but recognize the importance of honesty. You've tried the classic "hoping things will get better on its own" and unfortunately it hasn't played out. When giving feedback, here are a few things that I try to keep it mind. Start with empathy. Step into their shoes and understand their story. If you don't know, ask. Be genuinely curious. Feedback is a dynamic affair. Shared communication with a shared goal towards progress. Take the emotion out of it. Focus on the situation, not the person. Focusing on the person adds unnecessary weight to an already emotionally-bloated event. Be specific. Give clear examples. Vague feedback equals dismissed feedback. Doing above won't de-awkward things fully, but it will dampen it and increase the chance of better outcomes.

Negative Feedback, Positive Lessons

In the battle against plastic bags, a five-cent tax was shown to be much more successful at deterring usage than a five-cent credit for bringing your own bags. Carrots satisfy but sticks sting, and they sting hard. So we default to the less painful choice of avoiding loss. Loss aversion impacts the way we process information. A 2019 study invited participants to learn through a series of multiple choice questions. Each question only had two options to choose from. Whether guessing correctly or not, they would still learn the right answer. Despite the identical learning opportunity, participants were much more successful at recalling the answers they guessed correctly than those they got wrong. "You're right!" feels good. We savour the moment, analyzing every detail. "You're wrong!" stings. We want to quickly forget, dismiss, and move on. When we succumb to loss aversion, we miss opportunities to learn. Failure is part of the process. We'll experie...

Herman Ye

Search