Targets should not be seen as a one-off, static, thing. In my daily Investing Activities, my Targets are under almost constant review. The review period is up to Readers but I would suggest a minimum of at least a Weekly Review. I suppose if you are a very busy person and very much a Passive Investor, then maybe once a fortnight is right for you but that seems a long time to me and a lot can change fast.
My approach is that every Night I ‘plonk’ (on ShareScope you hit the Space Bar to get to the next Chart) through my Charts for each Stock I hold using ShareScope (these are the Charts you see in my Blogs) and I am constantly thinking about Targets. For example, if I have only bought a Stock recently and it has not done a lot, I don’t obsess too much about reviewing my Target – but I always have a Target typed into a Spreadsheet for each Stock when I buy them and I use the ShareScope ‘Notes’ boxes to put the Target clearly on each Graph.
When I buy a Stock, I put a Line in at the Price Level from when I bought it and I can easily see when the Stock has gone up a lot and might be in danger of reaching my Target. When I see such an event, I quickly flick to the ‘Details’ Screen and grab my Calculator for a quick run through of likely Targets based on the Forecast Earnings and sensible P/E Ratios. I usually put a comment in the Text Box like “Target 400p max with a P/E of 18, maybe 380p should be Sell level due to Resistance on Chart” – something like that, it varies, but I like to put a Target Price and the reasoning behind it. This means that when I look at the Chart on coming Nights, I can quickly realise what I was on about when I wrote the text.
I am constantly updating these Target Text Boxes and once the Price gets very near my Target, I am even more focussed on what is a Sensible Price Level to sell at and what the Chart Price Action is in the Short Term. For instance, the Price might Spike up and be just short of my Target Price, but because it is then likely to fall back, I might decide that I should sell it and accept a bit less than my Ideal Target. Yet another factor where ‘Art’ comes into play.
That’s pretty much how I monitor the Targets – I guess Readers have similar approaches and various ways of recording the relevant numbers. If you don’t do this, it is a very good discipline I find and well worth the effort. You could easily have a little notebook or something to record the details in. Whatever works for you.
This is the real beauty of Software like ShareScope – it enables very fast analysis of Charts and Technical Indicators and you can also speedily whip over to the Fundamental Numbers that are so vital to calculating Targets etc. ShareScope really is my ‘Workbench’. The Screens are exactly as per what is in my Blogs.
I have included below 2 actual screens as I am using them currently – TTR and AA. – you can see my Text Box comments and the Green Horizontal Lines are where I bought Shares and the Blue Horizontal Lines are where I bought Spreadbets. The other lines are just chart trends and stuff and really just me working through thought processes to a large extent – but I have shown you these to give a Real Insight into my Workbench.
Remember, everything I do and show you is real and not theoretical nonsense.
What should I do once the Target is hit?
The simple rule once a Target is hit is to review it again and decide what to do in terms of Actions that arise from this Event. It might mean a reassessment in full depth of the whole Bull Case for the Share and maybe resetting a Target if you decide to hold or you might decide to sell all or perhaps just part of the Position.
The paragraph above applies to a Long Term Investor – Shorter Term Traders might have a more rigid approach where they determine a precise Stoploss Level and a precise Target Level – sometimes they even place a ‘Limit Order’ which says something like “Sell when Price reaches 120p” or something. From my limited understanding, I think most Traders are looking for a Risk/Reward Ratio (i.e. the amount of money at risk before the Stoploss is hit divided into the money to be gained if they reach the Target) of 1/3 – although some will accept 1/2. In other words, if the Risk/Reward Ratio does not indicate that they expect to make 3 times the money they put at Risk, then they do not put the Trade on.
I throw that in for completeness, but really I am writing more with Long Term Investing in mind.
Once a Share has reached my Target, it is often quite straightforward with regard to what my Decision is – this is because I have usually been thinking about it for at least a few days beforehand or, more likely, I have been adjusting my Targets and my Actions for several weeks before. For instance, I might have a Text Box on my main ShareScope Chart Screen which says “Sell half of Position at 450p and run the rest to 500p”, or similar.
I find in practice that I am thinking about Targets a lot more than just at night when looking at my ShareScope screens. As an example, I might be reading an article on one of my Stocks in Investors Chronicle and it makes me think that a certain Price Level would be an appropriate Target – if this is the case, I usually scribble it on a scrap of paper and update my ShareScope Notes Box that Night. These kind of Triggers can come from all sorts of sources – they might be from looking at a Chart during the day or perhaps from something whizzing around on Twitter. I might be having a chat with a mate on the phone and between us we come up with a sensible level to sell at.
The key point is that Targeting is very fluid in my world – but one big consistent element is that I never like to rush any decision and I like to think everything through coolly, calmly and rationally – preferably after Market Hours when things are relaxed and unstressed.
Potential Drawbacks of using a Target
The biggest argument against using Targets in the way I have described is the danger of psychological ‘Price Anchoring’. This is where you get a certain Price in your Mind and your Kahnemann ‘Fast thinking’ Brain then latches onto this Number and lets it cloud your otherwise careful and logical judgement. For instance, you could sensibly and rationally come up with a Target Figure and then fixate on this to your detriment – say you think a Stock is worth 400p and you then put huge Emotional Capital into this Target and when something bad happens like an awful Profit Warning you don’t sell at 350p to bank a nice Profit because you are totally married to the 400p Price Target. It is vital to be aware of this kind of Risk and to constantly Monitor your Targets as I discussed earlier and to try and be as objective and cold as possible. If you are not sure, why not ask somebody via Twitter or something or just ask an investing mate over the blower to check if your logic makes sense.
Some would argue that having a Target is nonsense – this is often said by more Technicals-based Trader/Investor people who say that the best method is to not take any view on the Value etc. but to use a Trailing Stoploss which you move up behind the Price as your Profit builds. I understand this method but have never really got on with it – I guess it has the usual Stoploss problem that you can get kicked out of a Great Stock for no real reason on a spike or a bit of silly and unwarranted Market Negativity. For instance PETS (Pets at Home) is a Stock where twice since listing people using a Trailing Stoploss will probably have been kicked out. For me PETS is a classic Long Term Buy & Hold Retail Rollout story and there is no way I want to be kicked out early. Each to his/her own and all that.
Of course a major catch with using Targets as I do is that it takes time and effort. If you are up to your neck with the usual distractions of Life like Jobs and Kids then it is not easy to find time. I guess you’ve got to try and ‘make time’ (sorry, I had to use that sad old cliche) and maybe you need to hold fewer Stocks if you cannot manage the ones you have properly. I have a huge advantage because I am a Full Time Investor but this is not an option for everybody (yet). The Trailing Stoploss method I mentioned above may appeal to someone with limited time and/or concerns that they are unable to do the Targetting well.
Linked to the last sentence above, a key drawback with my Target Setting approach is that you need to understand it and know what you are doing. I hope I have explained it well but if you still don’t really get it then perhaps you should go for a Trailing Stoploss. However, I am open to questions via Email and/or Tweets etc. if you need more clarity.
Right, that’s the spiel on how I use Targets and why they are important – if you have not read the first 2 parts in this Blog Series it might be worthwhile. In summary they keep you in the Trade which is vital to make really big Profits and they also enable you to keep Topping Up as your Winner rises – having a good idea of a Stock’s Valuation and where it is likely to go to can give you confidence to keep adding. Remember, the Power of Momentum is Free and you need to take advantage of it – tame the Big Mo to your benefit.
By running Winners in this way and Compounding the gains by Topups and eventually Selling out and rolling the Cash into a new Up Escalator you will be well on the way to making Strong % gains year in, year out.
Right, go and get Targeting !!
Yours fully directed, WD
The original article was written by @wheeliedealer on 12/11/2015.
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