There is a broad group of individual investors who are completely out of stocks or significantly under-invested. Many were paralyzed by fear in the time after 2008. They have still not returned to investments in stocks.
This is a natural and normal reaction to risk. People fear losses more than they crave gains. This natural human trait causes most investors to do exactly the wrong thing at the wrong time!
There are multiple sources of fear, but the current theme is that it is too late for this year. If you have not been invested, you have missed the rally for three reasons:
- The market has already made most of its gains for the year, getting close to the targets of the most bullish of prognosticators;
- The move has been too far and too fast;
- The time of seasonal weakness is upon us.
Let us focus on the first of these reasons - the price target.
Why We Need Moving Targets
Here is an idea that can liberate investors:
Ignore calendar year market forecasts!
If you are looking for an investment edge, here it is. Most people analyze portfolios based upon the calendar. World events march to a different drummer!
This year is a great example. The annual forecasts were done at a point when everyone was worried about the fiscal cliff, a downgrade of US debt, an imminent recession, and a hard landing for China. When this did not happen, (an eleventh hour result that I predicted), the market rallied about 6%.
Suppose that you missed that rally. Should you pretend that the facts did not change? Should you remain anchored to your December, 2012 forecast?
Or should you adjust your thinking to reflect new evidence? Just suppose that the fiscal cliff issues had been resolved in November, 2012. We would have started 2013 from a higher level.
I have a personal method that has worked well for more than a decade: I use a rolling twelve-month forecast. I do this for individual stocks and also for the market. I refuse to be chained to the calendar.
When the underlying data change, so does my price target. The calendar does not matter. My thinking is flexible, taking what the market is offering.
Some Agreement from The Street
I am surprised and pleased to see that some top analysts are recognizing the need for more frequent reviews of their price targets. Instead of going with the knee-jerk reaction, please give some careful attention to these analysts, who see S&P targets as high as 1760 for this year:
There are others in the club.
As background, Bespoke noted more than a month ago that the rally was approaching the Street targets - check the chart and commentary.
Goldman Sachs boosts from 1575 to 1625.
Morgan Stanley's bearish Adam Parker boosts to 1600.
These are all analysts who recognize that circumstances have changed since the time of their original forecasts. This is in sharp contrast to what happened at the end of last year, when analysts stubbornly held to foolish forecasts.
This is one of the easiest ways for the average investor to get an advantage over the big-time sell-side forecasts. Most data sources provide earnings for a calendar year. At "A Dash" I try to do better by finding the best sources.
Isn't it obvious that a rolling one-year forecast is better than locking into the calendar?
I explain to all of my new investors that even good years will include a correction of 15% or so, regardless of the fundamentals. I cannot time these and neither can anyone else. It just comes with the territory. Develop and stick to your forecast.
Looking at the long-term fundamentals is the key to long-term success. There are many stocks trading at significant discounts based upon current earnings. These can often be found via Chuck Carnevale's first rate website.
I will try to elaborate further on this theme, but this installment is timely.
Disclosure: I am long CAT, AFL, JPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.