Hey guys, it's sasha, one of the most important and most difficult things in investing is knowing what the target price for a stock should be, and there are a lot of people out there, including me who will share different views, different methods, different approaches on how you Can work out the target price, but there is one massive problem with a lot: a large majority of these target price predictions that i am seeing. This is a huge misunderstanding that a lot of people have about target prices and it's one of the most common. Investing mistakes out there, as i see it, i will sometimes talk about a stock, and i will share what i feel a fair present value for that stock is based on my maths and the most common question i get asked when i do. That is.

When is that target price for is that next year? Is that in five years time, when is the target price going to come through? When do i expect that target price to happen, and then i go and see a lot of other people in social media and on youtube who talk about target share prices and they say that theirs is x dollars by the end of 2022 or something like that And this is a big problem, because when i hear someone say something like that, i get alarm bells ringing in my head because it doesn't make any real sense to me. Let me explain why, and by the way this explanation does get deeper through the video. So stay around, if you want a little bit more depth and science when you're, making an assessment of a company's target share price, you are trying to determine what you think. A fair value for each share of that company is the fair value that you would be happy to pay and feel like you're, neither overpaying nor underpaying for that share and a fair value of a company at any one time is your best guess at what the Sum of all future cash flows from that company will look like discounted to the present value of those cash flows and divided by the total number of shares.

So let's say that i go and build a model that says the company i want to invest in will make me, let's say: 10 billion dollars next year, i'll then discount it by 10, and so the value adds 9 billion to my valuation and then the year After that, maybe that company will make 20 billion and i go and discount it by 10 twice so the present value of that 20 billion in two years is just 16.2 billion today and so on and so on. So you go and do whatever it is that you do. Maybe you like multiples, maybe like building models. I don't really care.

However, it is that you decide to do the math and you come up with a number and you have your target share price. You have worked out what you think a fair value right now of that company is for you to buy it right now because remember we're talking in present value terms of those future cash flows. So here is what just happened. You have a company that has a current share price of x dollars.

You think that a fair price for that share is actually y dollars. So, if x is much lower than y, then you will probably want to invest, because if the current share price is much lower than the share price that you think it should be, then you see an upside. You are buying something at an effective discount, but when will you get that upside? When will those numbers come through? When will the share price actually reach, or maybe even surpass your target price? Well, this is the answer that everyone seems to want to know the answer to, especially because we seem to have this mentality of get rich, quick and people getting ridiculous returns on questionable assets. But here is a little secret.

You can build a very sophisticated model for what you think the share price should be. You can't build any kind of robust mass model that holds any real water. That will tell you when that share price might actually happen, because the market moves in mysterious ways. Today the market decides it doesn't like the company and it sends their share price plunging tomorrow it does the exact opposite, and sometimes there can be literally nothing happening with that company at all to cause either of those movements.

There are a million reasons for the day-to-day fluctuations in the share price. There is just so much exogenous factors, different funds, doing their thing, massive investors doing their things, other companies that have nothing to do with the company you're investing doing something else, and none of us can predict them with any real accuracy. But it is also reasonable to assume that if you think your target price is more accurate than the current share price as a representation of what the share price of that company should be, then there will be a normal distribution around that of what the share price Is at any one time now it might not be perfectly normal for the particularly massive people. It may be skewed one way or another for whatever reason, but that doesn't really matter for the point i'm making.

The point is the further. The current share price is from your target price. Then, on average, the sooner you expect it to begin normalizing towards fair value on average, because it is highly unlikely for a share price to stay very far away from a fair value for a long time. You can see that in the distribution of the bell curve now there may be other factors involved and the market might not agree with the evaluation for some time, etc, etc.

So it could take time, but the fact is. I can make a reasonably robust prediction of what the share price should be, but it is impossible in any reality to make a prediction for how fast the market will decide to agree with your target price. It could take a few days if you're particularly lucky, and that has happened to me before it could take a few months. But very often it will take a few years, because these things take time to materialize.

It takes time for people to realize that the numbers you're forecasting actually make sense, and some people might have a counter argument to that. They might say: hey sasha. Does it not make sense to make a prediction for what the share price will be in a year or maybe in two years, so that then you know what you expect the price to be, then so that then you can understand what the difference between then and Now is so instead of say: discounting the cash flows to today's date. You could instead effectively discount them to say the end of 2022.

Now, the real reason people usually do. This is not because of this reason, it is actually usually because people are quite lazy with working out the target price they'll just get a figure through some lazy projections in 2025 or 2030, it might be ebitda or free cash flow or net income or whatever, and Then we're going to take that number and they'll multiply by 20 and they'll say all right. So my target share price is x and they feel this is scientific because they still had to do some forecasting to get to that net income or ebitda. Whatever number at that point in time in the future before multiplying, but what is the point of this metric? Are you sitting here in 2021, making an investing decision on what you are going to do with a load of money that you accurately envision that you will suddenly have at the end of 2030, because that is the decision that you're essentially making by that mass? And if you're making the decision right now, then why is the target price in 2030 in any way relevant? Even if you are amazing at mass and work it out perfectly by forecasting all the future cash flows from 2030 onwards, you are not investing money in 2030, you're investing money now so at best at best, even if you are good at doing that, you are ignoring All the cash flows between now and 2030 in your assessment, cash flows that your investment will essentially be part owner of and if you're discounting at a low rate of just 10, then the values in 10 years time are worth 65 percent less when you discount it To today's value, so a hundred dollars that the company might be making in 10 years is only worth 35 today, but if you just scan more at a higher rate, as many people do, let's say at just 12.5, then suddenly that hundred dollars in 10 years is Only worth 26 today so you're discounting all the numbers in the future, which are worth much less today, but you're ignoring the much lower discount rate figures between now and that point in the future, and here is the killer point that really can make some people think Differently about this, a company could be a good investment now, based on what your target price is right now, but the same exact thinking and the same exact models might tell you that it will not be a good investment in 10 years time.

For example, if you invest in a fast growing company right now that is particularly undervalued you, it might well be that in 10 years time you'll think the company will be mature. You will have much more robust and much more consistent revenues, which will be much easier to predict and much more the same year or year, which will usually result in far less misalignment. Far less volatility around the target share price in the market and also the opposite. Could be true, a company might not be a good investment right now, but it might be a good investment in the future, because you feel that maybe the next few years are going to cost the company a huge amount of money.

And there is a large amount of risk involved around it, but if things play out as you expect that investment might carry considerably less risk and considerably more upside in a few years time as a result, but you are not investing at a point in time. In the future, you are not sitting there wondering, should i go and invest an amount of money in 2030 you're making an investing decision today using money that you have today and so the next time you hear somebody go and say that the target price for a Company has a set expiry date or a set date on which they think it will happen. Ask yourself why that is and how did they arrive at that date because that's the important bit and because in most cases, that question doesn't have a particularly good answer now, if you found this video useful, please don't forget to smash the like button for the youtube Algorithm, thank you so much for watching and as always i'll see you guys later, you.