What a difference a year makes.
Around a year ago, in March 2020, the Citibank research team downgraded DBS Group Holdings Ltd (SGX: D05) to “SELL”, saying that shares are worth a mere S$17.50.
Following the downgrade, shares of the local bank did indeed close below the S$17.50 mark.
For a single day, that is.
Following that fateful day, DBS Group shares have mostly been on the uptrend.
But the target price saga was far from over.
Curiously, amid the backdrop of its rising share price, the same research team started to adjust the target price up to S$19.65.
By June 2020, just three months after tagging DBS Group to be worth S$17.50, the target price was shifted again, this time to S$25.50.
To top it off, DBS Group shares were now considered a “BUY”, with the value of the shares supposedly increasing by almost 46% in a matter of months.
As of 6 April 2021, a little over a year later, shares of the local bank are trading at around S$29.00.
But a burning question remains.
How is it that DBS Group can be worth a mere S$17.50 in March 2020 …
… only be adjusted to S$25.50 just three months later?
The answer lies in the assumptions that are fed into the calculation.
In March 2020, Citibank research said that short-term Federal interest rates will take a hit and stay at zero.
That was the version of the future entered into the calculation of the target price.
In June 2020, Citibank cited US economic research that new developments had led them to believe that the earlier forecasts were too pessimistic.
And by inputting another version of the future — viola, you get a higher target price of S$25.50.
The sequence of events should inform you that the target price of a stock can change according to what you think the future will be.
In other words, behind all the high-sounding language and complicated math …
Everyone’s just guessing what the future will be.
At The Smart Dividend Portfolio, we took a different tack.
Instead of engaging in the vagaries of target price setting, we opted for something much simpler: patience.
Our timing for buying shares of DBS Group was not perfect …
… we bought shares in April.
We did not manage to get the lowest possible price either …
… we got shares at around S$19.34 per share.
BUT we were patient.
Despite all the bad news swirling around the bank, we believe the situation was going to be temporary.
At our buy price of S$19.34, we paid roughly one-time book value for DBS Group shares. At that valuation, we felt that the odds of a good outcome was tilted in our favour.
To top it off, we were going to be paid dividends as we waited for the effects of the pandemic to blow over.
As of today, we have collected S$1.02 in dividends from DBS Group. And with shares up above S$29.00, we have snagged a little over 55% in total returns, including dividends received.
Investing doesn’t have to be difficult.
Investing does not require you to be an economist or a math genius.
And thank goodness, investing does not require you to perfectly time your entry for a stock.
Otherwise, there would only be one day where you could get DBS Group shares below S$17.50.
BUT it does require one thing: patience.
We did not time our entry perfectly. We did not get the lowest possible price either.
Did it matter in the end?
Well, I have yet to see an investor who is sad with a 55% return in a little over a year.
As such, I would argue, target prices do not matter as much as most investors imagine.
So long as you have a good understanding of valuation and with that, tilt the odds to your favour, I submit that you will stand a far better chance of coming out on top in the future.
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Disclaimer: Chin Hui Leong owns shares of DBS Group.