• Losses are explained, justified, and accepted.
• The people promoting the company find ways to determine value that have no relationship to profits.
• The people promoting the company have a vested interest in it.
• The new methods that are being used to determine value tend to make more use of words and less use of math.
• Management presumes that efficient capital will always be available.
• Large numbers of superstars suddenly emerge from nowhere.
• Sales projections are double to triple digit percentage increases. These increases are well beyond the range of any prior numbers used by other businesses.
• Sales projections give no consideration to the fact that we have a cyclical economy.
• Management doesn’t consider market saturation of the company’s product(s) to be a problem.
• Competition is expected to be kept somewhere between a minimum and nonexistent.
• Management anticipates that the company’s products will have no manufacturing problems.
• Management expects that the company’s inventory will be perfectly managed and balanced.
• Management’s plans assume that product delivery will always be on time.
• Management operates on the basis that products will be exactly what the user wants, that they will work as projected, and that affordability will not be a problem.
• When any changes are made, they are predicated on static analysis (which does not consider unintended consequences).
• There is a mantra throughout the company that designs and ideas are more important than product performance.

Summary

The concept of fad investing has recently dominated the American investment landscape. Since fad investing is highly emotional and is not anchored to earnings, values tend to be inflated well beyond what traditional methods would assign. In other words, a promoted excess of demand has created artificial values.

Some very significant events have taken place on the economic front. There is an energy crisis. Consumer confidence is at the low end of recent times. Financial institutions have written off almost one trillion dollars. The Fed has provided financial support with more needed. The unemployment rate is climbing. The dollar is setting record lows. The threat of inflation is becoming more of a reality. The GDP is barely breaking even and arguably could be negative. The result of these economic events is that the concept of fad investing is changing to real investing.

Consequently, there will be a significant adjustment downward for many of the investments that fad investors have bought. Declining values will bring cries that there are great bargains available. Remember, if present values are still supported by a fad concept, then they will become an even better bargain as they decline further.

This real-versus-fad investing concept is not new. Our country has gone from farmer to industry to service, and each change has brought about a new set of promoters. Each time the results are the same: A few people get richer, and a lot more lose money.

Apply the characteristics that we have listed above to your potential investment and decide whether it is real or a fad. Then remember the chart above, and never forget to ask that all important question: “If I’m wrong, how much can I lose?”

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