10 Dec Fad and Flash-in-the-Pan Investing
It’s tempting to chase nearly every and any deal, especially when it comes to microcap stocks. Any opportunity has “potential” they say. Some don’t know when they’re truly turning down a great opportunity. Reality must temper the dreamers and discipline investors. This is one of the reasons fads and flash-in-the-pan opportunities–while good for making a quick buck–are not the types of opportunities that should be sought in a “go public” market that is still attempting to legitimize itself as a viable alternative to an IPO. While we ourselves don’t offer investment advice or directly raise any capital for our clients, we do try to look at each opportunity that comes our way and assess it based on the merit as if we were asked to assess it as an investment advisor. Frankly, many don’t make the cut. Here are just a few reasons why:
- They’re start-ups with little or no revenue
- Management is sparse and experience of management is sparser
- The product is new, untested and lacks broad market appeal
- The product or service has no stickiness and is essentially elastic in its demand
- Alternatives can be easily created and there’s no barriers against competition
- Market leaders in the “fad” industry already exist
Even large companies like Krispy Kreme and Baskin Robbins have been replaced by the likes of Menchie’s and cupcake shops. The faddish flash-in-the-pan investments companies of yesteryear will eventually be replaced by a change in culture or taste of a new generation of businesses. Some investors can certainly work at finding and riding each fad, but those that are most successful will be the companies with not only the ability to read and adapt to changing market conditions and consumer tastes, but more specifically those who’re invested in the consumer himself/herself will ultimately win. I also suspect that as the digital revolution continues to play out that many traditional brick-and-mortar chains–unless their truly fad-proof–will be unable to weather changing cultural and taste storms.
Fads and tastes will come and go and large companies will need to adapt to ensure they’re not left irrelevant in a quickly changing world. Look at Facebook for instance. When Facebook gave up significant equity for Whatsapp, it’s difficult to argue against the fact that Facebook is fighting to stay around as other digital “fads” and “flash-in-the-pans” arise. The same holds true on the microcap level. Unfortunately, the downsides of betting in such stocks when they’re fads bites even harder.
For the truly strategic investor with a good acquisition strategy, riding a wave of fads is exactly what they’re looking for. They’re seeking the unicorn companies that will provide them the serious pop in a public offering that makes the headlines and drives up the value of the stock. This, of course, flies in the face of the Warren Buffett investing style of taking the long road.
It’s difficult to ignore the shooting star investments. Long investors betting on them and short investors betting against them have made many extremely wealthy. Which side of the coin will you be on? Which is your strategy of choice?