Investing In Fads
Over the period of time, there have been a number of fads that could have made small investors large amounts of money.
Trends tend to persist over the long term and are generally based on fundamentals.Although fads are often confused with trends, they are actually quite distinct Fads, on the other hand, are generally marked by temporary and excessive enthusiasm, which turns out to unsustainable. But for investors who know when to get in (and get out), fads can provide a portfolio boost. However, if investors get caught up in the hype, they’re likely to suffer the crash to which nearly every fad succumbs.
The Hula Hoop has been called the “greatest fad of them all.” Developed in 1957 by Wham-O creators Richard Knerr and Arthur “Spud” Melin, it was modeled after an Australian toy. A prototype was developed and tested on U.S. playgrounds and was found to have the longest “play value.” After only four months on the market, 25 million Hula Hoops had been sold. In less than a year, sales had almost completely stopped and competition was increasing, so Wham-O entered foreign markets and its success continued. Collectively, toy manufacturers made $45 million off the Hula Hoop.
Predicting When to Buy and Sell a Fad
The key to making money on both a fad and a trend is the timing of the purchase. From an investment standpoint, the entry point is extremely important because a fad can move a stock from an unknown to a high-flyer in a short period of time.
Even more important is knowing when to sell because a fad can turn from cash to crash in no time at all. As with the example of Crocs, although the company’s sales continued to grow at an amazing pace, Wall Street was already dissatisfied with great numbers – investors wanted mind-blowing results, and when the company failed to deliver, investors dropped the stock.
From Fad to Trend
So how can you tell that a current fad might become a more profitable long-term trend? Let’s look at a few current examples.
The most likely current fad to turn into a sustainable trend may be emerging market investing. Even though stock markets in China, Brazil and India have skyrocketed the last 10 years, that is likely to be where the growth will come from in the future and stock returns should reflect that.
That said, promising fads contrast to niche sectors that show signs of being a bubble that is ready to burst.
Conclusion
In the end, both fads and trends tend to begin in the same manner – with lots of hype around the new product. The key to determining which direction the company will take depends on the viability of the product and the willingness of the company to adapt to changing market demands. The majority of the time the end result will be a fad, and as long as investors realize this, there will be an opportunity to make money. The keys to success are research, attentiveness to the action of the company’s stock and being honest with yourself about the product.