In our review of financial media, headlines tend to highlight areas of the market that are either doing very well or very poorly. The extremes, hot or cold. Investors seeking opportunities may be tempted to look into shares of companies in the former camp. Often, the media coverage showcases the immense growth potential of these businesses. These firms will allegedly revolutionise their industry and change the world — implying people should invest in them now, get in on the ground floor and reap the benefits. A popular example today: companies whose primary business is artificial intelligence (AI). We think investing based solely on this type of criteria is limited. In our opinion, investors should refrain from pursuing the investment fad of the day.
Investors following the investment fad of the day are engaging in a practice known as ‘heat chasing’. This term is used to describe the behaviour of investors seeking investments that have performed best recently. It can also be used to describe trying to invest in the ‘next big thing’ — the company, industry or even idea that seems poised to be a top performer in the future. There are a couple issues with heat chasing, in our view.
For one, it generally presumes past performance is an indication of future returns. We see this as off-base. While investors’ emotional whims can dictate short-term price fluctuations, conditions like the broad economic environment, sector trends and the company’s specific strengths and weaknesses generally have the biggest impact on share price over any meaningful length of time. Said differently, what is upcoming matters more than what just happened. A share’s past price alone has no bearing on where its price will go in the future.
Second, heat chasing implies investing is a get-rich-quick scheme. If you find one company or idea that seems poised to do very well, the thinking goes, it will bolster your portfolio and set your financial future. However, we think successful investing is more akin to a marathon: a long-term effort in which a single investment doesn’t determine success — or failure.
Heat chasing relies heavily on hype, and we don’t think hype is a sensible rationale for owning a company’s shares. Shares are partial ownership in publicly traded companies that give you a right to a company’s future earnings. In theory, you hold shares because you think the company will be more valuable in the future. However, despite all the metrics and tools available in the investment universe, there isn’t any way to know with certainty what equities will do next. Thus, the disconnect between investors’ expectations and reality can cause share prices to move considerably.
Consider: If investors don’t think a company will be profitable — but reality turns out otherwise — that creates a positive surprise. Because reality is better than appreciated, this typically boosts the company’s share price, presuming all other variables are constant. The converse is true, too. If investors have outsized expectations and the company doesn’t deliver, that would drive a negative surprise. The stock isn’t worth as much as initially thought, which could weigh on the share price. One of the primary pitfalls of chasing an investment fad is that expectations are set very high at the onset — perhaps irrationally so. Their popularity gets priced in. That makes it harder for reality to meet them.
This also places too much attention on either a single security or sector. We think investors’ portfolios should be globally diversified. That means having broad exposure to the market geographically and by industry — including areas you think may not do as well. We think one of the most important lessons in investing is knowing you could always be wrong. If you focus on companies whose businesses depend on a popular idea, your portfolio may be taking on unnecessary risk — and it could set you back if your thesis is incorrect.
Plus, trying to find companies that exclusively focus on the investment fad of the day can blind investors to potential opportunities. For example, when it comes to AI, investors don’t necessarily need to find the small firm whose entire business completely relies on a nuanced component of machine learning. Even if the potential reward is high, the potential downside is equally high. Moreover, companies in other sectors could utilise AI in their business to improve profitability. A global financials company could use AI technology to improve efficiency. The same with a giant health care conglomerate. You could get exposure to — and benefit from — a popular idea without having to take on company-specific risks.
Contrary to what media portray, you can do well — and reach your long-term investment goals — with a diversified approach that doesn’t require you to discover high-flying gems that explode onto the scene before anyone else sees.
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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in equity markets involves the risk of loss and there is no guarantee that all or any invested capital will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world equity markets and international currency exchange rates.
This document constitutes the general views of Fisher Investments UK and Fisher Investments, and should not be regarded as personalised investment or tax advice or as a representation of their performance or that of their clients. No assurances are made that they will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts may be, as accurate as any contained herein.
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