Last weekend in marketing class Dr. Bond made a comment about being aware of when you get into a market. Nobody would have given capital towards a big investment in knockoff Pet Rocks or Beanie Babies because it was obvious that they were going to fizzle quickly.
A market which is dependent on a trend continuing for a long time probably isn’t a good place to invest. Certain trends can be counted on to continue for a while, but most cannot. If something is trendy, it lacks depth as an investment as a new market entry. At least it most likely does. Consider a more recent trendy investment, Alpaca ranching:
How did prices get so high? The U.S. alpaca market is a classic example of a commodity bubble, like the Dutch tulip bubble of the seventeenth century. As with any bubble, explaining the irrational behavior of the investors in the market is not entirely possible. Part of the explanation is television advertisements like this one, which exploit the elderly and uninformed. Saitone and Sexton write that most of the speculators were smallholders and amateurs without access to objective agronomic analysis, and that other species of livestock that inexperienced farmers can raise in a backyard have also generated bubbles, such as emus, ostriches, chinchillas, Merino sheep, Shetland ponies and Berkshire hogs. They also note that there is no way to short an alpaca as you would a stock, which removes one check on the exuberance of the market.
People lost their shirts on this. I read about this a while back because some family members were getting into it.* My skepticism on the investment was that it costs more to feed and take care of an alpaca than the fleece is worth, not counting the amortization of the initial investment, which isn’t small. The goal, I was told, isn’t to sell the fleece but to raise and breed and to sell the offspring to other breeders. It struck me a lot like a multi-level marketing thing, which I tend to be really skeptical of since people who get in near the end of one of those tend to go broke while others get rich if they got in early. And now you read stories like the one above where people are abandoning their animals to the elements because it’s hard to give them away when you realize you’ve lost your investment and don’t want to sink any more money into them.
So be careful about anything where you can make “a lot of money, quickly, with little effort.” It may actually be too good to be true. Especially be wary if it’s “trendy.”
*These are relatives that I had no reason to believe would listen to my financial advice, by the way, so I didn’t lend it. I hope if any of them are reading they won’t consider this a version of “I told you so.” Predicting the future of a market is a dicey game and so I don’t tend to give financial advice to others unless they ask, and before my EMBA program I would have been a lot less knowledgeable or credible on the advice in the first place.