Fads and Fashions
"Following the crowd" is something that we have all been guilty of. But new investors are more likely to "follow the crowd" and fall in love with the latest fad. This is a great risk, and a dangerous one. Newer investors tend to be particularly attracted to fads and fashions in investing. Remember the internet bubble back in the 90s? So many people lost money buying in at the end of the cycle. Of course, those who bought in early made great profits, but these investors often bought in on fundamentals, not hype.
As investors, we look toward the "next big thing." Sometimes this motivation leads us right into a Red Alert zone. The investment mess from the internet bubble is just one example. History is full of stories like the Tulip Craze in Holland back in the 17th century. These crazes cause people to follow each other over an investment cliff without thinking, like lemmings on a Science Channel special.
Think about the clothing industry and its fashions. History shows that the "latest" trend lasts only a short time. So, while investing in trendy clothing stores may bring short-term success, the failure is often even more spectacular? and inevitable. Typically, by the time we learn about a "new" trend, it's already "so last season".
We can even get hurt in fashion trends that are not immediately visible. Oh sure, athletic shoes are every bit as popular as they've ever been. Or are they? Over the past 5 years, hiking shoes have snuck up on the "sneaks" in popularity. That's right, hiking boots and shoes are in; tennis shoes and sneakers are out. But instead of buying stocks from Timberland, think about Nike as a long-term stable investment instead. Anyhoo, it's probably too late to buy Timberland now. The fashion trend has already had its day. But because of this experience we can expect new footwear trends to show up. It may be too late to adapt, it's nearly impossible to keep up, and by the time we figure out where the trend is headed, we've probably missed the stock price rise.
So how do we avoid the mistake of buying out of sheer excitement? The answer is simple. Look for companies that are bor-ing. Investing in apparently dull companies can actually be beneficial. Boring companies normally don't have share prices that are puffed-up by mood swings and emotional buying. We're simply buying an income stream - the most affordable way to invest. Also, the company's future prospects are more secure, because they aren't at risk of missing a major shift.
Okay let's face it. Owning a firm in Ohio that makes widgets for industrial fasteners is not as "cool" as discussing your ownership of Tiffany's, or the latest nanotechnology corporation in Silicon Valley. But guess what? That widget-producing firm in the heartland will be more dependable, and will probably provide a better return on your money. And isn't that why you're investing anyway?
Now, we're not telling you to avoid trends altogether. Trends are important to investing. In fact, if you can get in ahead of the curve, there are great short-term opportunities when you buy in to fads. But here, we're usually playing the "greater fool theory": we assume that someone else will pay more than we did, even when we know it isn't worth it. I mean, many of us made money in the internet days playing this game, but if someone else saw the fad first, we could be wasting our money.
There's no harm in buying stocks that might become "popular" in the future, if you can predict future fads, and then sell them after they become overpriced. But to remain sane and safe, stick to companies with solid fundamentals: earnings, stable growth, strong balance sheet, etc. In other words, only buy companies that are good values with good prospects. If a company carries some attraction for fad-followers, so much the better. But don't pay extra just because of the "bling-bling" and the "glam" appeal. Fads and fashions are unpredictable - make no mistake. Don't buy the stock unless you'd want to own it even if your fashion prediction falls flat. If it still looks good - even if your guesses about tastes are wrong - then maybe it's a worthy holding.
Successful investing is not just finding profit opportunities, but keeping your losses to a minimum. Don't buy stocks that have no substance. Stay away from the bling!