Look no further than the recent move the stock of Google (GOOG:NASDAQ) made over the time period ranging Dec 2005 to the end of Jan 2006.
With GOOG trading in the $400 and in a nice uptrend, the greed starting setting in. CNBC brought in analysts banging their drums, $450 one said, $500 said another. Each analyst coming on had to out-do the previous one with another amazing prediction based upon voodoo valuation methods of the moment from respected firms like PipperJaffray.
Not to be outdone, an analyst from a semi-reputable firm named Caris & Co wanted some of this limelight, he came on and blew everybody out the water with a lofty target of $2000 per share.
Joe Sixpack sitting by his TV watching CNBC was simply amazed by this, Joe could buy GOOG today at $420 and it would go to $2000 soon because it is on CNBC, so it must be true.
GOOG went on to hit $475 on Jan 11 2006 as small investor flocked into the stock based upon these wonderful official price targets, but was this a good idea?
Depending on your time horizons, those $500 and $600, maybe even the $2000 targets may be hit, but not anytime soon as Joe Sixpack would think. So was it a good idea to buy the stock based upon all the positive news? No.
The opposite also holds true, GOOG stock started to pull back following all the lofty targets, The stock dropped from $475 to $337 a few weeks later, accompanied by a slew of negative comments from news sources and advisories that the stock had moved too far too soon.
If you recall the title of this article and applied the adage, buy when everybody is selling, once again, you would be ahead. At the peak of the negativity when some big names where insisting GOOG is overvalued, something very predictable happened, the stock turned around and started heading upwards.
By being able to read the signs that are clearly visible, the smart investor is able to act against the crowd and profit from such situations. Remember, it is always darkest before dawn, look for the signs, they are all around you, profit from them!
Terry Jones is a participant in the HotStockMarket.com message boards.
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