So my friend thought it was a good idea to follow an analyst's Target Price
Sit down, everyone - I'm going to tell you a story.
See, I met this guy during my army days, and he opened a trading account after we left. "This is how to make your money grow," he told me. "I can give my parents a treat, I can buy my girlfriend new stuff, etc, etc."
Long story short, he had some spare cash lying around, he was new to stocks and trading, and he was hoping to make some money.
What happened to him was one of the things that inspired me to start this blog - I wanted to tell other young investors to never follow anyone blindly, no matter how professional they may seem. I don't care if they're analysts, senior analysts, or the CEO of the SGX. NEVER follow blindly. Always do your own due diligence, and buy when you are confident.
How many of you remember this little gem called Eratat Lifestyle?
It was a penny stock - a company based in China that put out fashion apparel. I believe the price was around 0.12 or 0.13 per share when my friend went in (somewhere in 2013). The analyst's report touted a target price of 0.24 with a 1-year horizon, speaking of the company's financial statements, the apparel market in China, new distributors, and an award for 'Most Transparent Company'.
He had slight reservations about Eratat, but went through with it anyway." The analysts know better than me," he told me, after I expressed some concern about the company. "We're just students."
He paid the price for his trust. Not only did the company not reach the touted TP of 0.24, the company flatlined. The company was suspended for defaulting on bond payments.
The thing was - there were a few red flags that had already been brought up on online forums about the company, which my buddy could have found if he did his own due diligence.
In other news: Portfolio is still looking good. SinoGrandness's price has hit 0.625, and I think it'll go higher. I'll hang on to it for a while before taking profit.
Thanks for reading guys.
Until next time.
Creed
See, I met this guy during my army days, and he opened a trading account after we left. "This is how to make your money grow," he told me. "I can give my parents a treat, I can buy my girlfriend new stuff, etc, etc."
Long story short, he had some spare cash lying around, he was new to stocks and trading, and he was hoping to make some money.
What happened to him was one of the things that inspired me to start this blog - I wanted to tell other young investors to never follow anyone blindly, no matter how professional they may seem. I don't care if they're analysts, senior analysts, or the CEO of the SGX. NEVER follow blindly. Always do your own due diligence, and buy when you are confident.
Analysts aren't gods. They CAN be wrong.
How many of you remember this little gem called Eratat Lifestyle?
It was a penny stock - a company based in China that put out fashion apparel. I believe the price was around 0.12 or 0.13 per share when my friend went in (somewhere in 2013). The analyst's report touted a target price of 0.24 with a 1-year horizon, speaking of the company's financial statements, the apparel market in China, new distributors, and an award for 'Most Transparent Company'.
He had slight reservations about Eratat, but went through with it anyway." The analysts know better than me," he told me, after I expressed some concern about the company. "We're just students."
He paid the price for his trust. Not only did the company not reach the touted TP of 0.24, the company flatlined. The company was suspended for defaulting on bond payments.
Looks like a body of water right there. Stagnant water.
The thing was - there were a few red flags that had already been brought up on online forums about the company, which my buddy could have found if he did his own due diligence.
-%-%-
I've always believed that analyst reports help to add a particular perspective when thinking about a company's prospects, but I've also maintained that we should not follow their target prices blindly. They should be given credit for their research and their efforts, and I'm sure they've all put in a ton of effort to get where they are. But never follow their TPs blindly.
Fellow young and new investors, take note - they're not gods, and they CAN be wrong.
A certain study conducted sometime back in 2012 (from financialpost.com) on over 11,000 analysts from different countries returned a 30% success rate of hitting target prices over a 1-year horizon.
A few of our local bloggers have also wrote on this topic. If you guys are looking to read up more on this topic, all you have to do is Google it - you'll find stories and articles aplenty. For instance, I believe Budget Babe did a piece on OSIM a while back, and it's a pretty good read.
-%-%-
Thanks for reading guys.
Until next time.
Creed
Analysts are NOT investors or money managers. Their job is to analyse and not investing. Investing is more than just analysing. Get it?
ReplyDeleteThat's actually a good point, Uncle8888. I will bring this up in the future when warning new investors to not follow blindly. Thanks for visiting!
DeleteFlattered! I didn't know about Eratat though. Good lesson for your friend.
ReplyDelete:D Thank you for stopping by! When I realized his story would help new traders/investors, I asked him for permission to post it.
Deleteyes, eratat was a classic. While revenue was increasing, its receivables were growing just as fast. What made it bad was that the company took bonds at a high % despite being cash rich. To add icing on the cake, the company held trade exhibitions, invited analysts over, held adverts in chinese TV stations, had a well known Taiwanese Singer endorsing their products and products selling in China.
ReplyDeleteIt was a well thought out plan, I would say
Hey, thanks for stopping by! Very well thought out indeed. Glad to know someone else remembers Eratat XD
Delete