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Be Skeptical of Analyst Forecast

One of the best ways to guard your portfolio against a market crash is by maintaining a healthy level of skepticism. Wall Street isn't a charity; it's a bunch of businesses focused on making money for themselves. Helping small investors make a profit is Item No. 382 on the list of Wall Street priorities, falling immediately below ensuring that the new assistant knows exactly the right amount of sugar to put in the morning coffee.

Be skeptical of analyst forecasts, whether it's a prediction that oil will hit $110 or that Internet Capital Group (Nasdaq: ICGE) will break $250. While Internet Capital Group's price targets were trumpeted on TV before the crash, I haven't seen many apologies for the stock's subsequent performance. It's now trading at prices that are a mere fraction of the targets set back then.

Rather than blindly trusting the analysts, make sure you understand the companies you're buying. Understand what risks each business faces, and what competitive advantages will help the company overcome hurdles. Be particularly wary of high growth estimates, because analysts tend to be optimistic, and high growth is difficult to sustain. If the company fails to achieve overly ambitious growth estimates, the stock will be hammered. Finally, buy a stock only if, after conservative analysis, the company is trading at a bargain price. Stocks tend to return to their intrinsic value, so buying below that value provides significant protection in a crash.

 

source: fools.com

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Posted by ibooyah on October 15, 2006 09:12 PM |

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