The Peril of Fashion & Investment Fads

2 Min Read

Fads go in and out of style quickly and regularly. They always have and they always will. I remember having to own a pair of "Girbaud" jeans back in junior high. They featured a tag of the brand name jean on the fly (see picture below). Every kid in school had to have a pair. I remember begging and pleading with my mom to take me to buy a pair or two with the money I had saved up doing chores like weeding and mowing laws. These were NOT cheap jeans but somehow wearing those jeans made you feel different. Unsurprisingly, this fad lasted just a couple years. After all, they were like any other jean. The peer pressure many teens face during school years to follow the crowd and do the cool thing is very real and strong. When the “All the other kids are wearing them” comments happen, a huge psychological effect takes off in our brains. Without a reality check, you could be out shopping for the “90’s Girbaud jean” to follow the fad only to take them to the second-hand store the very next year.

The Investment Fads of 2021

Similar situations exist in the investment world. Meme stocks like “GameStop and AMC” are like fashion fads. They will come into favor for the short term and will attract a lot of quick attention. Then, the fad will change, and they will fall out of favor as investors realize the fundamentals of the business are not solid or the price of the company is way too high driven up by the hype of the fad. These stock prices are artificially high by headlines and social media posts, not by fundamental changes in the businesses.

Hype is the primary force behind the making of a fad. This is one way to discern the wisdom of an investment. Positive hype often drives prices significantly higher and fuels overconfidence for “investors”. The lack of positive hype can deflate an asset and cause “investors” to dig in even deeper with their speculative convictions. Hype initiates a fad; our emotions keep the fad going.

Buyer Beware

“Investing” in a fad is not real investing, it is speculating. This is because price movement is driven more by what someone says or how a group of people feel than the underlying value or business the asset represents. Such stimuli are overly sensitive and may change radically on a daily basis without any foundation. Fads can make or lose you a lot of money. A fad can be a fun and exciting way to “invest”. But beware, such excitement may be short lived. And the cost of the powerful, yet temporary, excitement may be significant.

Looking Forward

Expect to see more fads (fashion and investments). There will be things that appear to work better than your strategy or current wardrobe. There will be talks of “this time is different” and “paradigm shifts” to rationalize opinions and investment decisions.

The ultimate question is whether you want your portfolio to be as exciting as the latest hip “Girbaud jeans” fad, or whether you want it to be invested in a well-diversified time-tested portfolio that works for your retirement goals, not the latest fad. I advise the latter.