There's nothing wrong with internet stocks or mortgages. And yet, internet stock mania came crashing down in 2001 and structured credit helped cause the Great Recession of 2008. In both cases a normal asset class became "the next big thing." Risk was ignored because the rewards were just too easy. Extended price increases "proved" that this time it's different. And besides, you don't want to be the one guy at the office party who isn't making big bucks in Pets.com stock or Miami condo flipping. The fear of missing out compels us to join the thundering herd. Unfortunately, it turned out to be a herd of lemmings.
When enough lemmings join an asset class or investment strategy, the risk seems to disappear. And it's at that very time that the risk is systemic. It's a risk that is retirement-threatening. These "investment themes" may be an asset, a sector, a stock or a type of strategy. It's always a little different, but it's always the same result.
History never repeats, but it rhymes. Past success and failure leaves clues. You can investigate what worked and what didn't and apply those principles to what's going on right now. So let's perform a thought experiment right now. What "Investment Themes" have the following characteristics:
Systemic Lemming Characteristics:
- The talking heads on financial TV and your friends on the golf course are singing the investment themes praises.
- There's a convincing story as to why this is the next big thing. Look for terms like "disruptive," "cutting-edge," "proven," or "next generation." These are words that cool people use to make themselves sound even more cool to us, the great unwashed masses.
- Too many retail investors and even a few professional money managers believe there is little to no risk in the investment theme.
- You don't honestly understand why and how the investment theme works at the nitty gritty detail level but you don't want to be the low IQ investor who asks his question to the board of Enron. So you just smile and participate.
There's probably more characteristics and I will work on making a more comprehensive list. On another subject totally unrelated to this topic have you heard of Environmental, Social and Governance (ESG) Indexes? If you'd like to learn more click here.