We’ve all been there. You’re at a party where one of your friends is talking about how they made an investment in something, and they made a fortune without doing anything! The lure of easy money is a siren’s song that has been capturing people forever. The precursor to chemistry as we know it today was alchemy. Alchemists were heavily focused on the idea of the transformation of matter, particularly turning metals into gold. If you could just drop a few protons, you could make lead into gold, and you’d be rich! It can’t be that hard, except it is. No one has ever done it. As technology has changed and advanced, we are presented with more and more investment opportunities. We may or may not understand what the product actually does, but it’s going to change the world, and you need to invest in it. Think about just the past few years. We’ve gone through cryptocurrency, blockchain, AI and crowd-based stock purchasing. Any one of these things could have made you rich beyond your wildest dreams. The key was investing at the right time and also getting out at the right time. How do you do that? I am sorry to tell you that it relies a lot on luck. Let’s take a look at how ‘hot’ investments work and why they aren’t fundamentally sound for you to build a financial plan on.
In this article:
- This time IS Different!
- Get Over your FOMO!
- The Emotional Rollercoaster of a Market Timer
- The Bottom Line for Investors
This time IS Different!
If you take a minute and look at the history of investment trends throughout history, you see that throughout hundreds of years, there have been repeated incidents of people trying to hop on to the latest trends and make their fortune. In fact, if you go back to the 17th Century, you will see a story about something called ‘Tulip Mania‘ that occurred in the Netherlands. Stop me if any of this sounds familiar. After they were introduced to the Dutch people, tulips became very popular. If you know anything about tulips, they bloom early in the spring, and then the dormant bulbs can be removed from the ground and transplanted to other locations. The sale of the bulbs became a thriving market with the explosion in popularity of the flower. In fact, it is estimated that some single tulip bulbs sold for approximately ten times the annual income that a skilled artisan would make at that time in history. This led to speculative investors stepping in. These people saw the growing popularity of the bulbs and drove prices up based on contracts for purchases made in the futures market. And even though there wasn’t any actual value in these future contracts, they were often sold on secondary markets for high profits.
As I suggested, stop me if this sounds familiar…. cryptocurrency, anyone? Investors have always speculated on the value of different things. Ask yourself a question. If you see something new and can’t understand why people are paying so much for it when, as far as you can tell, there’s no actual reason for its value, what does that mean? In the 1600s, someone said that tulip bulbs were valuable. People went crazy buying them and lost out in the end because they owned flowers, which was not an investment. People always assume that this time, it’s different. Sir John Templeton, in 1933, published rules for investment success that included the idea that ‘This Time Is Different’ are the four most dangerous words in investing. Re-read that. He published that in 1933, and yet somehow, in 2024, people still think the same thing. Investors have blind faith in the idea that sure, the last get-rich-quick investment trend didn’t last, but this time is different! No one wants to miss out on that easy money. The end result of centuries of learning is that the people who know that this time is NOT different will be the ones who win in the end.
Get Over your FOMO!
Just to make sure that we’re all on the same page, FOMO stands for Fear Of Missing Out. Fundamentally, all investors seem to understand that having a sound strategy and sticking to the plan wins every time. In a perfect world, everyone would be able to stick to this. The problem is that we are also inundated with stories about people who became millionaires overnight because they ‘invested’ in the right thing at the exact right time. Again, I use cryptocurrency speculation as a key example. There was news coverage of this everywhere a few years back. People who couldn’t make their rent payments bought the right ‘coin’ at the right time and ended up extremely wealthy. (For those who enjoy him, John Oliver had a great segment on Cryptocurrency, FOMO, and why it is dangerous to speculate, but be aware it contains some colourful language) Here is where the FOMO kicks in. If it happened to them, why can’t it happen to me? I need to be part of whatever this latest investment trend is so that I can capitalize on this magical ride as well. Consider the fundamental idea of this, though: in order to capitalize on the same opportunity, you need to be doing it at the same time. By the time there are stories on the news, and your friends are talking about it, it’s too late. When you learn of something that has been really successful and your fear of missing out kicks in, the sad truth is that in almost every case, you’ve already missed out. By jumping in now, you may catch a small part of the uptick, but the reality in almost every situation is that once you start to hear about it on the news, most of the exponential growth opportunity is gone. Jumping in now is too late; you have already missed out. Making an emotional response as part of your investment plan hurts you in the long run.
The Emotional Rollercoaster of a Market Timer
I have long loved this image that I feel shows the rollercoaster that someone who tries to time the market for hot investments faces.
** We found this graphic here.
This is the internal monologue of an investor who is trying to time the market. The problem has always been what I said previously. As an individual investor, by the time you’ve heard about the next big thing in the news, it is too late. You need to be at the forefront of any purchase like this, and that means you are already invested when the masses jump on board, driving the value of your investment up. If you wait until the price has already risen, you are too late. You are making someone rich, just not yourself.
A Recent Example
Another example is what happened with GameStop shares in 2021. In case you aren’t familiar with what happened, the Coles Notes version of what happened is here. A lot of institutional investors believed that after COVID-19, GameStop, a brick-and-mortar retailer of video games and accessories, would be a business in decline. As a result of this belief, they short-sold the shares, basically betting on further declines in their value. Enter a Reddit community where they believed that this wasn’t the case and that GameStop was, in fact, undervalued. A few of the people held reasonably large positions in GameStop at the time, and through their online community getting behind the company (and also, kind of loving the idea they were messing up the institutional investor’s plans), the value of GameStop went up, way up. The fun part? Someone online known as ‘Roaring Kitty’ was the leader of this trend, and he purchased $53,000 worth of call options for GameStop in 2019. By January of 2021, that position was worth $48 million. Think of this: you hold significant stock ownership in a company and also have a reasonably large online following. You can use that following to increase the value of what you own exponentially, making yourself a fortune in the process. It is suspected that Roaring Kitty sold his position during a surge in trading that he helped create. What does this story have to do with everyday investors? It is another example of how you need to be first. The people who got rich here weren’t the ones who were late to the party and bought at higher prices. The big winners were the people who already held the investments, got to ride the craziness to unbelievable heights and then got out.
The Bottom Line for Investors
Warren Buffet has a lot of smart investment advice, but one of my favourites is, ‘All there is too investing is picking good stocks at good times and staying with them as long as they remain good companies.’ This is one of the most successful investors of all time, telling you that your best strategy is to understand what you own and why you own it and to hold on to it until it no longer makes sense to you. Having a good relationship with a financial advisor like the team at Strata Wealth & Risk Management will help you come up with a fundamentally sound investment plan that avoids trying to catch the latest trend and instead focuses on long-term sustainable growth that will result in a much better chance of you achieving your long term goals than you could ever hope for by chasing the latest investment trends. Your future self will be very happy with your decision to make and follow a plan rather than chasing the latest hot trends.
