Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
– Charles Mackay, Extraordinary Popular Delusions
and the Madness of Crowds, 1841
That quote from Charles Mackay on herd mentality is the very essence of the stock market and stock investing in general. It explains Wall Street volatility where the markets rise and fall at the slightest rumors and whispers. Herd mentality is the reason why recessions hit hard and fast while recovery; on the other hand, is slow and painful.
The 24-hour news cycle, your Google and Facebook news feeds, as well as various other news sources all, feed off herd mentality and its cousin, shiny object syndrome – all competing for your eyeballs that advertisers covet.
The herd isn’t interested in old news. It’s always looking for the next big thing, and CNN, Fox News, YouTube and Google all know this. That’s why your Google News feed is loaded with shiny new investment companies and sectors.
Only newsworthy companies like Uber, Lyft, or Snap and exciting new industries like crypto, blockchain tech, or cannabis garner the attention of the masses. Buying agriculture stock just doesn’t have the same ring as investing in AI.
These innovation and tech news hogs are in the headlines every week. We hear about the latest innovations, the newest technology on the horizon and anything and everything in between predicted to revolutionize society.
It’s good hype for companies seeking capital to grow their businesses, but what happens when the dust settles and the business of making money sets in?
If you dug deep into many of these companies that are hyped and go public, you might be disappointed when the financial results start pouring in. As an investor, are you carefully weighing what these companies will actually deliver to you, the investor, or are you caught up in the hype as well?
Here is what some recent IPOs have delivered to investors:
- Uber is down 25% since its IPO in May
- Lyft is down 30% since its IPO in March
- Slack (workplace collaboration) is down 25% since its IPO in June
- Snapchat (Snap, Inc.) is down 43% since its IPO in 2017.
- Fitbit is down 91% since its IPO in 2015
The list of the latest and greatest stocks that have crashed and burned is long. These stocks didn’t exactly live up to the hype. Remember those x-ray vision glasses you ordered from the back of comic books when you were a kid?
That picture of the kid looking through walls with a pair of these glasses was truly worth a thousand words, and you just had to get a pair. So, you tore off the order form from the back of the comic book, filled it out and begged your mom to write a check for the cost and shipping, and in six short weeks, your glasses arrived in the mail.
You come home from school to find the package on your bed. You know precisely what it is and can’t wait to rip through the packaging and put on your new x-ray vision glasses. Unfortunately, as soon as you put them on, the first words out of your mouth are not gasps of joy but four-letter words you hope your mom doesn’t hear. The glasses were not as advertised. Instead of giving you x-ray vision, they had the opposite effect. Because of the spirals painted on each flimsy lens, your vision was actually impaired.
With investments, our vision can also be impaired by hype. We suffer from shiny object syndrome and are happy to go along with the herd down the road of financial disappointment. However, had we examined the opportunity a little closer or asked the right questions, we might have saved ourselves a lot of money. With the x-ray vision glasses, had we looked at the fine print, we would have known that the “product is a toy and does not actually give the user x-ray vision.”
With investment opportunities, what kind of questions should you be asking to know whether an investment is right for you?
Actually, the very first question you should be asking is what you’re seeking in an investment.
Are you rolling the dice and hope something appreciates in the future or are you looking to build wealth?
If you’re looking to roll the dice and gamble on a stock or cryptocurrency in hopes a bigger sucker down the road pays more than what you paid, then, by all means, go for the next shiny object.
But, if you’re looking to build wealth, then it will serve you well to ask a few simple questions…
- Does the investment have any intrinsic value?
In other words, when you take away the hype, is there an underlying asset or viable underlying business, or is it all hype? With many failed social media stocks, it turns out that the underlying transaction was neither viable nor profitable. With something like commercial real estate, the underlying land and building will always have value and will likely never go away.
- Is the business currently profitable or reasonably expected to be profitable?
Many tech and other hyped companies at the time of their IPOs have never been profitable, and for many, there is no certainty they will ever be profitable. Fitbit has been downwardly trending for FOUR years because it hasn’t turned a profit since its IPO.
- Does the investment provide periodic income?
Essential for building wealth is periodic income you can reinvest for a compounding effect to build an income. Tech and other IPO stocks don’t offer investors periodic income – only the prospect of appreciation in the price of the stock. Central to the commercial real estate model is periodic income generated from leases and rents.
- How confident are you that your investment will appreciate?
Stocks are a crapshoot, and if anyone had a formula for separating the successful IPOs from the failures, we’d all be rich. Real estate on the other hand, despite periodic setbacks like during the Financial Crisis, can be counted on for appreciating over time because as Will Rogers once said about land, “they just ain’t making any more of it.”
The next shiny object, the next big IPO, the next big investment thing all sound exciting, especially with the hype train backing them up, but most exciting new companies struggle even to make a profit or deliver dividends or any returns at all to investors. And with quarter after quarter of disappointing financial reports, the prospects of your investment appreciating get dimmer and dimmer.
Bitcoin, gold, and other investments that are must-haves according to some experts don’t even offer the possibility of an income component and cannot deliver income like some well-known investments, only the hope of appreciation.
Getting caught up in these new exciting companies cost many investors their portfolios, but had they stopped to ask a few simple questions, they may have been steered to more traditional – some say boring – assets, while not as sexy as the shiny new object, deliver income and appreciation those hyped investments can’t deliver.
Invest for success,