Peter Lynch has given the investment world a lot of market wisdom. Here is one of his most insightful thoughts:
The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a ten-bagger doing that.
Frankly, I’ve never been able to predict which stocks will go up tenfold, or which will go up fivefold. I try to stick with them as long as the story’s intact, hoping to be pleasantly surprised. The success of a company isn’t the surprise, but what the shares bring often is.
I am not a long-term investor like Peter Lynch. I am a swing and position trader and yet I agree with his statement. This is why I have never been a fan of hard price targets. I believe in having a time stop for swing trades – giving a stock a certain number of days to prove that it deserves to be held. I believe in having exit strategies in both, my swing and position trades. Those exit strategies are never based on a hard price level. They are based on price cycles and invalidation of trends on different time frames. My reasoning is simple:
- I don’t know which particular trade will end up being a winner. I know that I’ll be right at least 50% of the time and my average winner is bigger than my average loser.
- I don’t know what profit will a particular winner deliver. It could be 5% or 50%. I know the average size of my winners, but never what the individual return will be in advance.
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