A Brief Analysis of Investing Fads

January 26th, 2021

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Whether you are a seasoned stockholder, or just dipping your toes into the market for the first time, one of the most daunting things about the stock market is the IPO chatter. There always seems to be this new stock that everyone keeps talking about, this new stock that you have to buy because the future is there and you will be rich in record time. This is called an investing fad.

Understanding Investing Fads

Investing fads are current popular trends that relate to investments. Investing fads are normally characterized by a temporary excessive enthusiasm, for a certain investment or style, which is usually unsustainable in the long-term. Investing fads are sometimes confused with trends, but there is a major difference. Trends tend to persist over the long-term and are usually based on fundamentals, whereas fads often die down after a shorter period. When investing, it is helpful to understand whether you are participating in a fad or a trend. If investors get caught up in the hype, they'll likely lose money when the fad fades.

Investing Fad Example

Between 1995 and 2000, investors sunk money into technology stocks with the expectation that these companies and startups would turn up a profit. During this time, however, most investors ignored traditional investment metrics and actually invested in a business model that favored building brand awareness and market share quickly, even if that required offering services or products for discount prices or for free. In 2000, such companies declared bankruptcy. Throughout 2001-2002, the bubble burst, the technology field suffered widespread layoffs, and tech investors entered a bear market (hint: we talked about this in one of our past emails).

Investors were so caught up in the ".com" hype, only for it to die down in a short period of time. This makes the ".com" bubble one of the most infamous investing fad examples in modern time.

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