Should I Follow The Money?
We have all heard that life is not a popularity contest. But, when it comes to investing, it mine as well be. Popular companies attract demand, which attracts customers, which attracts money. Popularity, over the years, creates thriving, successful businesses. Popularity, for the moment, creates bubbles, and those can break. So, when it comes to investing, you need to decipher whether that popularity will last or if it is short-lived. AKA in investing, you don’t want to look for fads, you want to look for sustainable companies. So, how do you tell the difference? Here’s how:
#1 - Who Invests in Them?
Not just personal investors but institutional investors. If it is a startup, are there legitimate venture capital firms invested in them, or are they some fly by night company? If it is a large corporation, who are their primary investors, what mutual funds hold their stock, how are their financials? You want to make sure reputable people invest in these companies before you do. It gives them legitimacy and shows they have passed their due diligence. If you can’t google the name of their investors or can't seem to find the CEO on Linkedin, you may want to pass.
#2 - Who Leads Them?
Has the company gone through 6 CEO’s in 6 months? Avoid! You want leadership in the C suite that has either been there for a few years or has lead other reputable companies. There is nothing wrong with a first-time CEO cough cough, I am one; however, there is something wrong with a first-time CEO if you are betting massively on a stock to take off. Unless you know the person individually and can vouch that they will lead the company to success, betting on a company that has green leadership is one that may be bound to fail. This is also why you look for #1 first. If a reputable investor is investing in them, they have the say-so to kick out the current leadership and replace them. The leadership is a function of the board, and the board is a function of the investors. Realize who really is in charge and whether you trust their leadership.
#3 - How Many Other Companies are Doing this?
Competition is a great thing when it comes to investing. If other people aren't doing it, that isn’t a good sign. That means it is either too difficult to make money in or it isn't a business idea that has real demand. Both situations you want to stay away from. Competition doesn’t have to be direct, but it does need to be present. There are a few companies that are popular but may not be solving a real problem. An example of this is Snapchat. Snapchat was hot for a few years, but its popularity has waned. Why? It isn’t well-monetized, it has a first-time CEO, and it didn’t evolve to any different product offerings. Snapchat may be categorized as a fad in the future. However, it did have competition! Their competition is Instagram, which created stories, that they stole from Snapchat. The difference is Instagram figured out how to monetize their platform, which makes it a better investment. The beautiful part about looking for the competition is that when you find it, it may be a better investment anyway!
#4 - Do I see this being sustainable?
Do you see the problem that they are solving still being a problem in 5 years? Do you think that the company has shown signs that it will evolve and tackle new problems as they arise? The reason companies go out of business isn’t because they were necessarily bad at running their businesses, they were bad at evolving. If a company doesn’t evolve, it dies. If you think this company is a one-trick pony, leave it alone. You are looking for companies who will change when the market does and be able to adjust at the right times. If you can’t see this company being around in 5 years, don’t touch it.
*One very important point I would like to mention is that I am taking this stance for investments over the long term. Fads can be useful in making money! In fact, they can certainly make you a lot of money in the short term. However, one big issue as an investor in fads is that you never know when the bubble is going to pop. Just like you don’t know when exactly the market may crash. If you always follow a long-term strategy, there should be no reason to get burned by short-term fads.