What is Investing Fads
Investing fads are current popular trends that relate to investments. Investing fads are normally characterized by a temporary excessive enthusiasm for a certain investing style, which is usually unsustainable in the long term. The dot-com bubble was an example of an investing fad where investors were more inclined to purchase a stock if its business had even the slightest exposure to the internet. That fad ended with the dot-com bubble burst.
BREAKING DOWN Investing Fads
Investing fads are sometimes confused with trends, but there is a major difference. Trends tend to persist over the longer-term and are usually based on fundamentals, whereas fads often die down after a shorter period. When investing, it is helpful to understand whether you are participating in a fad or a trend. However, for investors who know when to get in and get out, fads can provide a portfolio boost. However, if investors get caught up in the hype, they'll likely lose money when the fad fades.
A great example of a fad is the company Crocs, which went public on the Nasdaq in 2006 at just under $15 per share. The maker of rubber shoes enjoyed great success as the demand for ugly sandals expanded from a boater's or gardener's shoe to acceptable everyday footwear. Everyone from kids to grandmas were wearing the comfortable and eye-catching sandal.
The hype was extremely positive from the time the stock began trading publicly. Quarterly sales often grew by triple digits. However, just 20 months after going public in November, 2007, the stock hit an all-time high of $75. That same day, the company reported quarterly earnings after the bell that saw revenue increase by 130 percent. But, after making such a dramatic move higher, the revenue gain was not good enough for investors, and the stock fell the following day and never looked back on its way to a low of under $1 in November, 2008.
Making Money on Investing Fads
Money can be made on an investing fad, but timing the purchase and sale of the stock is key. From an investment standpoint, the entry point is extremely important because a fad can move from an unknown to the stratosphere in a short period of time. The best chance to make money on an investing fad is when if it becomes an investing trend. Both fads and trends tend to begin in similar places with lots of hype. The key to determining which direction the company will take depends on the viability of the product and the willingness of the company to adapt to changing market demands. Thus determining if a fad has the potential to become a trend requires a great deal of research and insight into a given industry and a company's place in it.