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Profiting from the New Thing

April 1, 2020 by David E. Hultstrom

We periodically get queries about how to invest in the latest hot area (3D printing a few years ago, blockchain and cannabis more recently).  We believe that fads (from tulip bulbs to blockchain) are generally poor investments.

To profit from new technology is harder than first appears. There are two ways to profit:

First, you can recognize the technology revolution – but if everyone recognizes it, then all the investment opportunities are already at least fully valued, if not overvalued (investors tend to get carried away). So you must recognize a new technology has enormous potential while others don’t see it. That is difficult to say the least.

Second, you can figure out which company is going to be the winner in the gold rush. Again, you must be better at predicting than everyone else. Another extremely difficult challenge.

History is replete with life-changing technologies, but in virtually every case, investors (in aggregate) lost money trying to pick the winners (though of course a lucky few made fortunes). Examples include the railway mania of the 19th century, the automobile industry in the early 20th century, the PC revolution in the early 1980’s, the dot com and internet boom of the late 1990’s, etc.

Railroads and cars might not seem like cutting-edge technology, but they certainly were at the time.

As Wikipedia notes, “There were over 1,800 automobile manufacturers in the United States from 1894 to 1930. Very few survived.” Even Henry Ford’s first attempt failed.

So, while we will probably agree that the current whatever is likely to be huge in the future, we would also recommend not investing in it. It is much more likely to be overvalued than undervalued.

One sign that the investment opportunities may be experiencing excessive enthusiasm is that you want in on the action!  FOMO is almost always a sure way to lose money.

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