Are you Fad Investing?

Mumo is currently a student in University. He has always been creative, so he has decided to make some extra pocket money selling t-shirts. His designs are rather unique, and the quality of the t-shirts is good. However, he is facing a problem. He can’t sell them. He keeps getting asked who else has bought them or how many he has sold so far. People seem fascinated with knowing who else is wearing them, before they can make a decision to buy them. Only a few people saw the value in the shirts and bought them. They did not even argue about the price, which Mumo had decided to discount until there was more interest in the shirts. However, those few 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 particular musician and is able to convince her to wear the shirt while performing. After her performance, several club and association leaders start wearing Mumo’s t-shirts. Soon afterward, the 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.

Some of the words that Wikipedia uses to define a fad are: ‘collective behavior that develops within a group for a period of time’. Do we treat investments as fads? Do we approach investments the same way as Mumo’s customers, who waited for the shirts to be popular before they could make the decision to buy what was obviously a good product? Do we let collective behavior 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. The stock market activity picks up when more people start buying shares. Due to this demand, share prices rise, similar to Mumo’s shirts. His 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 hadn’t changed. Imagine you were an investor in shirts. Wouldn’t the better time to pick up the shirt have been before everybody else recognized how good they were? You could have sold those shirts at three times what you bought them for, once everybody else figured it out.

So, back to the question on 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 definitely do your research on the individual companies, but there are possibly some companies for which the fundamental value (just like the shirt) has not changed. Many people are waiting for the market to become a fad again, and then they can invest.

This fad investing is not only found 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 rather than objective rationale. This is why agents put up the famous “70% 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 recognizing that because of the hype, it was overpriced.

For investors, the fact that many other people are doing it means that the opportunity may have passed and it’s now time to look elsewhere. Investors are always out to identify the gap. It is at when prices are down yet the fundamental value of the investment has not changed, that this presents a gap to be taken advantage of. In other investments, the gap could be something that needs tweaking. One of the students in the 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 the fad of quail eggs. Everybody decided that it 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 doing them successfully even now. It’s a business they have taken time to understand. Fad investing will not give you patience for the long term. Real investors are willing to wait the long term 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 or not work. What others are doing or not doing is not really a good way to make investment decisions. Don’t be the fad investor.
Would you like to make better investment decisions? Modules 6 to 9 of the Centonomy 101 Program cover investment in a comprehensive and easy-to-understand manner. Click here to learn more about Centonomy 101.

Waceke Nduati-Omanga runs programs on Personal Finance Management, Entrepreneurship and Career Success. 

Find her at waceken@centonomy.com| twitter @CekeNduati| Facebook /CekeNduati