Dash to Trash

What Is Dash to Trash?

Dash to trash is what happens when investors flock to a class of securities or other assets, bidding up prices to a point beyond what can be justified by valuation or other fundamental measures.

The stock or asset class that has been bid up is often one that has poor fundamentals and, therefore, is considered trash, particularly when compared to its inflated price. A dash-to-trash investment will most likely end up in a loss if investors don't exit the investment before the price correction that reflects the true value of the asset occurs.

Key Takeaways

  • Dash to trash refers to when investors rush to a specific stock or asset, bidding up its price to a point that is not justifiable based on the asset's fundamentals.
  • Dash to trash can occur with any investment but are most often low-quality stocks that investors purchase with the idea that a profit can be generated, even though the inflated price is not an accurate representation of the financials.
  • Investors typically buy dash-to-trash investments during bull markets, when investor sentiment is high and risk tolerance is low, due to the success of the markets.
  • If investors don't exit a dash-to-trash investment before the asset's upward trend is over, they will most likely incur a loss as the asset's price comes crashing down to a value that is reflective of its fundamentals.

Understanding Dash to Trash

Dash to trash is an occurrence where a group of investors bid up prices of a group of securities beyond a point that can reasonably be justified by looking at the assets’ financial state or recent history. This process pushes up the price of stocks for lower-value companies.

Dash to trash can refer to any security that investors purchase and bid up the price to a point that does not reflect its true value, however, it is most closely associated with stocks that are of low quality, cheap, and where investors believe a profit is possible. If investors hold on to these assets for a prolonged period of time, they are most likely to witness a loss as the price of the stock comes crashing down to reflect its true value; a point after investors have flocked to it and bid up the price.

Factors Prompting a Dash to Trash

The dash to trash phenomenon usually occurs during or at the end of a bull market, when investor confidence is high and belief in the prolonged success of the market is entrenched in decision-making. Investors have witnessed the success of many stocks and are looking for the next investment to generate a profit, buoyed by the belief that the markets will continue to rise.

Bull markets also tend to reduce an investor's risk tolerance, so the dash to trash phenomenon is often a symptom of investors becoming overconfident and thus becoming more comfortable with taking bigger risks than they would be during other times when they might be more cautious and risk averse.

This occurrence often involves a sort of herd mentality, where a mass of investors tends to act as a group and implement a collective movement that drives up the prices of a certain group of securities.

Dash to trash can also happen in an environment where returns are generally low, and investors are so eager to achieve any type of positive returns that they are willing to make higher-risk moves. In the end, investors who are involved in a dash to trash often will later regret their decision, when in the end they find that they are holding stocks with little or no value.

Example of Dash to Trash

The Smith Corporation is a small-time shoe manufacturer that has been losing money for several years, due to poor sales and high production costs. The company also holds very little in assets, except for a few pieces of machinery, and has witnessed a continuous change in upper management, all of whom have failed to turn the fortunes of the company around.

The stock has been trading at $5 per share, but some sudden positive event has the company in the news and the name is now trending. A bunch of investors rush to invest in the company because of the positive name association, bidding up the price to $15 per share, where more investors continue to purchase the stock, bidding it up to $20, even though the fundamentals of the stock don't place its value anywhere near that high.

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