Break Free from Target Price

Introduction

The US stock market is scaling new heights, sparking excitement and speculation among investors.

But what does this mean for your potential stock returns in 2025?

I’d love to give you a crystal-clear answer, but the truth is, that no one can predict market movements with certainty. Any promise of precise target prices should raise a red flag.

Here’s the reality: short-term market trends are unpredictable, and no one can truly control where stocks will go next.

Yet, the fascination with target prices remains enticing but often misleading. Let’s explore why focusing on fundamentals might be a better path forward.

The Psychology Behind Target Prices: A Closer Look

Target prices have undeniable appeal, offering a seemingly clear number to guide buying or selling decisions. But while the idea sounds logical, reality often tells a different story.

It all comes down to assumptions. At its core, a target price is not a crystal ball; it’s the output of a mathematical formula. Analysts input various assumptions—projected growth rates, market trends, or economic conditions—to calculate a share price estimate.

And here’s the catch: change the inputs, and the result shifts dramatically.

The problem is that while formulas lack emotions, the humans using them don’t. Optimistic or pessimistic biases can easily creep in, turning target prices into reflections of sentiment rather than objective truths.

For instance, during times of fear or uncertainty, analysts may overestimate risks, pulling target prices down. Conversely, in a euphoric market, they might overstate potential gains, inflating prices.

Even though these calculations are mathematically precise, there’s no guarantee they will hit the mark. Studies show that target prices often miss their mark, with accuracy rates hovering between 30% and 50% depending on the market and time frame.

So, while target prices might offer a sense of direction, they’re best taken with a pinch of salt. Ultimately, investing success lies in focusing on fundamentals, not just numbers on a page.

Price is What You Pay, Value is What You Can’t See

In the early 1980s, consulting giant McKinsey estimated global cell phone sales would reach just 900,000 units by 2000. The reality? By the turn of the century, the world had sold a jaw-dropping 405 million units—450 times more than McKinsey's projection.

How did such a reputable firm miss the mark so drastically?

The challenge lies in predicting the future of rapidly evolving technologies—a feat that even the best minds can struggle with.

Take Amazon (NASDAQ: AMZN) as a prime example. In 2010, when I first invested, Amazon generated US$24.5 billion in annual revenue, primarily through its online retail business. But here’s the thing: it was impossible to foresee the powerhouse Amazon would become over the next decade.

The Rise of Amazon Web Services (AWS)

In 2015, five years after my initial investment, Amazon revealed its cloud computing arm, Amazon Web Services (AWS). At the time, AWS generated US$4.6 billion in annual revenue and US$660 million in operating income.

By 2023, AWS had grown into a financial juggernaut, reporting nearly US$90 billion in revenue and a staggering US$24.6 billion in operating income—more than the company’s revenue in 2009.

Subscription Services Explosion

In 2017, Amazon unveiled another surprise: its subscription business. With just US$6.4 billion in annual sales back then, this segment soared to US$40.2 billion by 2023.

Advertising: The Dark Horse

The surprises didn’t end there. In 2022, Amazon disclosed its advertising revenue, which had already hit US$31 billion annually. By 2023, it surged to US$47 billion.

The Bigger Picture

In total, these three once-overlooked segments—AWS, subscriptions, and advertising—generated a combined US$178 billion in 2023, more than seven times Amazon’s entire 2009 revenue.

Lessons for Investors

The moral of the story? The true value of a company often lies in what you can’t see. In 2010, no one could have accurately predicted the meteoric rise of these three businesses, let alone all of them.

As an investor, it’s vital to focus not just on what a company is today but also on its potential to evolve, innovate, and create entirely new revenue streams. After all, the real wealth-building opportunities often emerge from the unexpected.

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Investing Smarter: Managing Risk Matters

Investing is like planning a journey—there are countless ways to reach your destination. Some people swear by obsessing over stock prices or valuations, but let me share a secret: investing is about managing risk, not just chasing numbers.

The Bigger Picture: Valuation is Just a Tool

Valuation matters, no doubt. It helps you figure out if a stock is worth your hard-earned money. But here’s the catch: valuation isn’t the only risk in investing. A business with a shaky foundation can be risky no matter how “cheap” its stock looks.

Think about it. Would you rather buy a house at a discount if it’s about to collapse? Probably not. The same logic applies to stocks. That’s why I believe in starting with strong, high-quality businesses—companies with solid growth potential and a sustainable competitive edge.

Smart Risk Management in Action

Risk management isn’t just about picking the right stocks—it’s about being strategic with how you build your portfolio. Here are a few tips to keep you grounded:

1. Start Small with Unproven Companies: If you’re interested in a young or experimental business, start with a smaller position. Let the company prove itself over time before doubling down.

2. Pace Your Investments: No need to throw all your money in at once. Space out your buys and give yourself room to adapt as the business evolves.

3. Ignore the FOMO (Fear of Missing Out): Some of the best investments give you multiple chances to get in. If a stock truly has the potential to be the next Amazon or Tesla, you’ll have plenty of time to benefit from its success.

The Bottom Line - The Long Game Mindset

Here’s a mindset shift that will set you apart from most investors: investing isn’t about finding the “perfect stock” or timing the market. It’s about building wealth steadily, minimizing risks, and letting your money grow over time.

By focusing on high-quality companies and managing your risks, you’ll stay ahead of the crowd. The flashy headlines and get-rich-quick schemes may grab attention, but the real rewards come from playing the long game.

So, take a step back, be strategic, and invest smartly. Success isn’t about being the fastest—it’s about staying the course and building something meaningful.

Happy Investing!!