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Motley Fool Global Gains / GGM: Special Event


Subject:  Re: buy below price updated Date:  10/11/2007  4:26 PM
Author:  anuragupta Number:  98 of 111

I think that buy below prices are rather arbitary.

What matter is whether a company is undervalued at current prices or not strictly based on future prospects. Future prospects are a function of market conditions, company's approach and its current financial health.

The definition of undervalued is itself quite fuzzy. For example, one might consider a company to be undervalued based on expected growth of x% in share price. x could be anywhere > 10% depending upon the risk tolerance of an individual. It seems to me for many MF newsletters like SA, HG or GG the x values is 15%. Maybe someone from GG team can add what their target value x is.

I think there is easily an error margin of 50% in predicting future growth. So a 15% growth could be anywhere between 7.5% to 22.5%. Sometime when this error bar is exceeded, a sell recommendation is issued. Based on this logic, one can pick an "undervalued" pick within (1.5)x% (or 22.5% if x = 15%)of the price at which the undervaluedness is seen and not do bad most of the times. The higher the value of x and the error margin, the higher the range in which one can purchase the stock.

In the above context, a 30% movement in the target simply indicates a x value of 20% from the $34 price levels. And don't forget the error margin of 50% over the actual performance of x, which is one can get annual gains betwen 10% - 30%.

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