What is the buzz or unicorn investment you have heard about lately – IPO? Bitcoin? Real estate? Quail farming? Take a step back and do your research. Seek professional advice and don’t be too quick to be an early adopter of a market/ industry or an investment that is being hyped. We are living in the age of behavioural nudges, social media influencers and aggressive advertisements of investment options. We find ourselves having certain investment options as top-of-mind. This is mainly as a result of well-curated marketing nudges that we water every time we switch on our preferred media to find more information, watch news, google or listen to our favourite influencers.
I get a lot of clients asking how they can invest their hard-earned savings. Mostly young/ middle-age in formal employment who are risk averse and looking to get passive income. In our interactions, I pick out buzz words and hyped investments that they’ve heard would be profitable and most of such investments are urgent and with limited information. And herein lies the problem. Most of these investments are in the mature/ decline stages or are just hype with no value. As an investor, seek first to understand and have a longterm plan. It is not possible to reap what other people sow years earlier. Plant your seeds, water them and allow for growth without buying into ‘get rich quick schemes’.
Borrowing from the product life cycle, Rogers’ bell curve for product adoption and the five stages of a financial bubble, all products – investment products included – have five stages from introduction to decline and ultimate death. When considering an investment, establish its stage in the product life cycle and find out if you’re within the profit opportunity or mass market. Be careful not to buy investments that are almost obsolete which the early adopters are keen to dispose. Also be wary of fraudulent schemes that promise high returns. The early investors of Facebook, Linkedin and Twitter reaped differently from those of Theranos, Wework, Yelp and Enron.
Hyped investments scenarios to watch out for:
- Fraudulent schemes – Investment products or companies that promise high returns and are not transparent about how they make their money. This may include ponzi and pyramid schemes. For instance Bernie Madoff’s $65B dollars scandal, Enron e.t.c. They usually have charismatic leaders at the forefront and a buzz in the market.
- Pump and dump scams – People/ companies promote an investment product or stock that they hold. Aims at boosting the price by creating hype through misleading recommendations by popular influencers and exaggerated statements. This increases demand and pushes the prices up. Once the prices have increased sufficiently through the demand of unsuspecting investors, the promoters sell the stock and get abnormal profits. You can read more on this here. It’s also a popular strategy for real estate developments in areas with low demand and poor infrastructure.
- Investment products in the mature/ decline stages – We have become accustomed to the rise and fall of prices in the investment industry due to the forces of supply and demand. In certain instances, when investors have privileged information about a product that might affect the price, they seek to dispose off as much of their stock/ shares as possible. An unsuspecting investor may see this as an opportunity to acquire a certain stock but in real sense, they will only be helping the early investors cash out. Consider this story about bitcoin. “As excitement built, more and more people got involved, forming the conditions for a bubble; but many of us were too caught up in the hype to exercise caution”, says Peter who made $1M and then lost it.
- Billion dollar startups ‘unicorns’ – According to an article by CBNC, the chance of winning big is extremely low if you were not one of the lucky few to get allocated shares in the IPO. In most cases, even if you were allocated shares at the IPO, its not likely to be profitable in the short-run. “After lockup expiration some investors, especially venture and growth capital investors, do start selling, which can put pressure on the stock price unrelated to fundamentals”, says Draho.
To be on the safe side, invest in what you understand, research widely, trust your instincts – you’ve spent all these years learning and improving yourself, your opinion counts. In addition, you can get a financial advisor/ coach to work with you based on your risk appetite. A long term financial advisor is your best bet as you get to test them with the passing of time. And as with everything else, be patient – good things take time.