Beware bubbles, fads when investing

Investment fads come and go. The proponents are ardent about their explanations, but mainly driven to make money for themselves. Remember that Warren Buffett is quoted as saying, “Price is what you pay. Value is what you get.” This is the first of two articles I have for your amusement and education.

Price is subject to the laws of supply and demand. If demand for an asset exceeds the supply of that asset in the short run, then the price of that asset should rise and may exceed the long-term value of that asset. Prices can increase dramatically when seemingly everyone wants to buy an asset.

Recall the internet bubble of the late 1990s and the real estate bubble that precipitated the financial crisis.

In both cases, when market prices exceeded the long-term intrinsic (real) value of the assets, and when buyers stopped buying, prices fell dramatically. Similarly, if there is a large supply of an asset but few buyers (low demand) at any point, then the price is likely to fall, perhaps below intrinsic value. If investors recognize this value and start to buy the asset, demand increases relative to supply, and the price should rise. Value investing is the practice of buying assets when their intrinsic value exceeds the current market price and selling assets when the current market price exceeds the intrinsic value.

Though bubbles and fads seem obvious in hindsight, some are apparent today. Look no further than marijuana stocks, cryptocurrencies, blockchain and plant-based proteins to see investment fads. Recently companies with the word blockchain in their name have gained value without any real connection to or use of blockchains in their business.

While hindsight is 20/20, today’s stock market is replete with many faddish stocks that long-term investors should avoid. A plant-based meat replacement company recently completed its initial public offering (IPO) at a price 73 times sales….

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