Are you ‘fad’ investing?

Mumo is a university student. He has always been creative and he decides to use his talent to make some extra pocket money. He goes into the t-shirt design business. His designs are unique and the quality of the t-shirts is good – but people just won’t buy them.

They seem more interested in finding out who has bought them and in what quantities before they can make a decision to buy them. Only a few people have bought the shirts – which he has sold at a discounted starter price. However, those people are not enough to sway the mob.

One day Mumo finds out that a certain musician is coming to campus to perform. His cousin knows this musician and is able to convince her to wear the shirt while performing. After her performance, several club and association leaders start wearing the t-shirts. Soon after, demand goes through the roof. He is now selling at three times the price that he initially sold them for. Mumo’s shirts have now become a fad on campus. His patience and hard work have paid off.

A fad can be defined as collective behaviour that develops within a group for a period of time. Do we treat investments as fads? Do we approach investments the same way Mumo’s customers do, waiting for an investment avenue to be popular before making the decision to buy what was obviously a good product? Do we let collective behaviour determine our investment decisions?

I think we might be doing just that. Last week someone asked me whether they should hold off investing in the stock market since it was low and prices were down. They were thinking of waiting until activity was higher. The stock market is a good example for this analogy.

Stock market activity picks up when more people start buying shares. Due to this demand, share prices rise. As with Mumo’s t-shirts, prices went up when demand increased. However it was the same shirt that he was selling a few months ago at a third of the price. The product hasn’t changed. Imagine you were an investor in shirts.

BEYOND THE HYPE

Wouldn’t the better time to pick up the shirt have been before everybody else recognised how good they were? You could have sold those shirts at three times what you bought them for when everybody else figured it out. So when is the best time to invest in the stock market? It is when prices are low that one should be looking for bargains.

Investors do not shy away from investing just because everybody else has held back. They know very well that when things turn around it will be these same people who will come into the market and make their investments very profitable. For an investor, it is always a good thing to go in before the mob or the crowd. You want to be wearing the t-shirt before it becomes a fad.

You want to have seen the value and benefit before anybody else. Remember, the t-shirt is the same product whether it was cheaper or more expensive. With shares and any investment, the product is the same. You need to do your research on the individual companies, but there are possibly some companies for which the fundamental value  has not changed.

Many people are waiting for the market to become a fad again and then they can invest, and not just in the stock market. Lots of people have bought property because other people are doing it. We sometimes get what is called FOMO with investments. Fear Of Missing Out starts to drive our decisions. This is why agents put up the famous ‘70 per cent sold’ sign when selling apartments. You will think that others have caught onto something that you haven’t.

I have heard stories from people who bought property and cannot sell it years down the line because they were like those who bought the t-shirt when the price was at its peak, not recognising that because of the hype, it was overpriced. For investors, ‘many other people are doing it’ means the opportunity may have passed and its now time to look elsewhere. Investors are always out to identify the gap.

Sometimes the best time to invest in a strong company or concept is when prices are down. Other times, it is because the investment presents a gap that can be taken advantage of or tweaked. One of the students in our Centonomy class presented a story about a lady who bought an unprofitable tuck shop. She turned it around by realising that money could be saved by making the snacks in-house rather than outsourcing.

That was the gap. I think we all remember quail eggs. Everybody decided that was the new side hustle. Most have given up now but you will find that those who had been doing quail eggs before the fad are still selling them successfully. It’s a business they have taken time to understand.

Real investors are willing to wait once they have understood what the opportunity is really about. They are not expecting the benefit tomorrow and this is why they do not get distracted by the temporary ups and downs of the investment environment. In fact, the volatility at times opens up new opportunities.

When making investment decisions, shut out the noise and get to the root of what makes this investment work. What others are doing or not doing is not really a good way to make investment decisions. Don’t be the fad investor.