By ROBIN POWELL
Reading the money pages in the weekend newspapers can be quite intoxicating. Most weekends there are articles about the next big idea to invest in. It might be artificial intelligence, “meatless meat” or driverless cars, for example. The ideas always seem so plausible. Journalists and fund management companies are highly skilled at weaving compelling narratives to reinforce the case for taking the plunge. But investing in the next big idea isn’t just a bad idea; it can also be very risky.
There have always been fashionable things to invest in. In the 1840s, for example, investors got very excited about railway companies. In the 1890s, believe it or not, bicycles were the next big idea. In the 1960s, when electronics was all the rage, a whole slew of companies sprung up with some garbled version of the word “electronics” in their name, which usually inflated their price, even if the company had nothing to do with electronics! In more recent memory, the late 1990s saw a rapid rise in the stock prices of internet-based companies, or “dotcoms”, driven by the excitement around the potential of the internet.
In all of those cases, the logic for investing appeared to be sound. Railways were a game-changing technology for the whole economy; bicycles enabled ordinary people to travel around more easily; electronics also transformed our lives, making complex tasks at work and home much simpler; and, as we all know, the internet has arguably had the biggest impact of any of those things.
In all four cases, however, most (yes, most) of the investors who tried to profit from these ideas ended up having their fingers badly burned.
© The Evidence-Based Investor MMXXIV. All rights reserved. Unauthorised use and/ or duplication of this material without express and written permission is strictly prohibited.