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CPI Preview: Inflation to fall below 14% YoY in May

Target price realization of stocks lies in the realm of time, not in financial

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April 16, 2024 (MLN): A good number of stocks lag to reach their target price within the time as predicted by Research Analysts. Does this mean that Fair Value and Timing for Value Realization are independent of each other? And, the two need to be viewed differently when analyzing a stock for investment.

“Seeing is believing”, has long been instrumental in shaping our spiritual and social life. And, now it has invaded our investing life too. For instance, our belief that a stock price will ascend to its fair value is deeply rooted in our observations of seeing share prices, in reality, moving and meeting their target value following Analysts’ predictions, not once but repeatedly. This belief makes us invest in stocks for return.

So, what is the point of inscribing the article when things stand so straight? It is the exception when stocks either took longer than expected to reach the target value or stayed at the same level despite no change in their financial fundamentals, if not declined. The archive is full of such incidents.

When such incidents are weighed from the vantage of “Seeing is believing” it leads us to believe in the truth of the statement that “Fair Value Realization” lies in the “Realm of time”, not in financial fundamentals. And, the latter simply serves as a reason for appreciation in stock price.

Till the time it is hypothesized and proven as false, the fact will continue to haunt the credibility of analysts’ proclamation about the realization of fair value within a specified time.

Does this mean that stock investors should not make “Timing for Value Realization” as an investment consideration while orchestrating their investing strategy?

The answer depends on, to which category of investors you belong. An institutional, a high net-worth, or a small individual stock investor. The existence of fair value within the realm of time is usually not a concern to Institutional and high-net-worth investors, as they have reasons and capacity for long on their investments, but surely is not an adorable idea for small stock investors who seek a return on their investment within short to medium time horizon.

For small stock investors, perhaps, a more pragmatic approach could be to create a balance between the two, i.e. continue to search for value within the price volatility for return in a short period, and simultaneously target the fair value by being long on the same investment. This may be exercised by bifurcating Investments in a single stock into Trading and Long-term investments.

For the concept “Fair Value Realization of Stocks lies in the Realm of Time, not in their Financial Fundamentals” to remain relevant, the estimated fair value must be free from analysts’ bias or from the influence of those who matter the most to brokerage firms. Any attempt to inhibit analysts from reporting the true fair value of stocks is bound to impair the concept.

So next time when investing in a stock, ignoring the Concept while investing in stocks might cost dear to you

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