Monday, August 27, 2012

Having a Target Price in Making Buy and Sell Decisions


Dear Investor Juan,

After reading almost all your articles I think I am now ready to dabble on stock investing.

I already followed you by having eliminate first my debts and already build an emergency fund. Now to the next step investing.

I will put part of my investment on BDO's UITFs, already have that on the way.

My question really is on stock investing. Is it a wise choice to apply the law of averages in stock investing?

Here's the plan that I currently have on my head, let's take BDO stocks as an example. Currently BDO is priced at Php 61.20 as August 17, 2012. I expect it to grow at least 30% so I expect it's value to rise Php79.56. Now I average the current price and the expected value and it would give me an average of Php70.38.  Now what I am thinking is to buy BDO stocks below the average price. Do you think it is a good approach on stock investing?

Also I am in this in the long run and would be investing on a regular basis. (Most probably every payday). Also should I sell when my expected value is reached and invest in other stocks? Or should I just hold onto it? As I said I'm in for the long run.



Dear Anthony,

Congratulations for reaching this stage where you can start investing in "risky" securities. Now the fun/exciting/nerve-wracking part begins. :)

Yes, I fully support your approach, and here's why. First, unlike many of us who only have vague notions about how investments or particular stocks will perform in the foreseeable future, you managed to come up with a specific figure, which is important in making objective decisions; how you came up with 30%, though, is another matter altogether. Second, assuming that you can justify the stock price growth of 30%, your proposed rules do make sense: buy as long as the stock price is below your 70.38 "minimum" and sell when it reaches your "optimistic" forecast of 79.56.

Here are a couple of ideas that you might also want to consider in refining your investment plan. First, apart from stock price increases, also consider cash dividends in estimating future returns, particularly for stocks that do pay dividends. Also, investing small amounts frequently will cost you more since brokers charge fixed per-transaction fees. Try asking for a fee schedule from your broker so that you can plan your purchases in such a way as to minimize fees relative to the size of your investment.

I hope you found my comments helpful. The best of luck to you!

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