The mass appeal of alternative energy and cryptocurrency are examples of trend investing that can lead investors astray
Trend investing can often be reduced to widespread false narratives—like the sure profits in South Sea shares, or the huge risk of a post-Y2K depression, or the certainty that oil would hit $200 a barrel. They happen rarely enough that they find a way into history. Personal false narratives happen much more often. But each one is a little different from the next, and most people would prefer not to talk about them.
Here are some examples of trend investing that drive a lot of speculation. I think they’re tied to false narratives. Of course, many people disagree. If you are one of them, feel free to have a little laugh when you read the following.
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Trend investing false narrative #1: “Solar (along with wind and other alternative power sources) are sure to win the war against fossil fuels. After all, many governments are promoting a society-wide shift to solar power from gas. Many car companies have announced that they will offer all their models in electric and hybrid versions. So, disregard financial troubles at Tesla Inc. It’s sure to make vast fortunes with its nifty electric cars, especially since it has genius Elon Musk running the show.”
The truth is that solar, wind and other alternative power sources are only competitive with conventional electric power because of the subsidies they get around the world, from various levels of government. Subsidies plus snob appeal fuel a lot of today’s demand for electric-powered cars. The war against fossil fuels won’t even begin until the subsidies end and the novelty wears off. In the meantime, electric-car owners have to plan their long drives very carefully, to be sure they can get to a recharging station before the battery runs out.
When you recharge an electric car, in some cases you’ll do so with electricity from coal-burning power plants.
Just remember that when demand drops, corporations routinely give up on grandiose plans. As well, governments have launched and failed to win lots of costly wars, stretching out over decades. That includes wars against cancer, organized crime and recreational drugs, to name three. Let’s not even mention Vietnam, Iraq and Afghanistan.
Trend investing false narrative #2: “Sell in May and go away”
The saying “Sell in May and go away” can actually cost you money if you go along with it. This saying is based on the observation that, over the years, stock prices have often gone sideways or dropped between May and October.
The problem with this kind of analysis is that it fails to distinguish between causation and correlation. The pattern of falling stock prices between May and October may simply be a coincidence, like the pattern that may appear in a series of coin tosses or spins of a roulette wheel.
Many investors have guessed right about a coming trend at one time or another. Maybe they bought just prior to a big upswing, or sold in advance of a major slump. In the long run, however, these experiences may wind up costing them money. They may bet twice as heavily on the next trend they foresee, with more volatile stocks, only to discover their forecast was 100% wrong.
Trend investing false narrative #3: “Bitcoin is going to replace the U.S. dollar. This will happen because of a voluntary switch from the U.S. dollar to bitcoin, which is already underway. People will keep switching to bitcoin because you can carry out transactions much faster and at lower cost in bitcoin than in U.S. dollars. Bitcoin transactions are much more private than U.S. dollar transactions, and you can transfer bitcoin around the world with no need to declare it to any border guards or government agents along the way. The algorithm that governs bitcoin limits total bitcoin creation to 21 million coins.”
The blockchain technology that bitcoin rests on seems to have a lot of commercial applications, and is undoubtedly a revolutionary invention. But bitcoin is just the first of many digital “cryptocurrencies” that blockchain technology can create. Why assume blockchain is the ultimate cryptocurrency? Why assume that all U.S. dollar users will go along with the narrative and shift to bitcoin?
Governments may use blockchain technology for their own purposes, of course, but they have no incentive to support bitcoin, or any cryptocurrency that can thwart taxation and help people hide assets and transactions.
Entrepreneurs have launched more than 150 blockchain-based bitcoin alternatives, and bitcoin enthusiasts have lapped them up. That’s a classic sign of an investment mania. Manias begin as a mass attraction to a specific investment or area of investment. They go on to include a wide range of related investments that have an ever-fainter resemblance to the spark that got things rolling.
Of course, these false narratives could still have a lot of life left in them. I’m not saying they will end overnight. I am advising against investing in any of these areas, since the odds, in my view, are heavily weighted against you.
How has your investing experience with alternative energies or cryptocurrencies fared?
Is there an investment you bought into as a trend that ended up succeeding? What do you think led to its success?
Comments
Don
Why do you appear to condemn wind and solar subsidies, which are miniscule in comparison with those supporting the established fossil fuel industry? Seems you are not being objective here, nor acknowledging the embedded costs to society in health and climate related issues from burning fossil fuels for energy. Those electric cars are not being powered by electricity by coal in most jurisdictions in the world now…Ontario being just one example….and range anxiety is rapidly being made redundant. Wind & Solar are cost competitive with natural gas already, with barely any subsidies impacting this….and the fuel source is free forever and infinite. Get with it Pat……you might be stuck in the past on this topic.
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Why do you appear to condemn wind and solar subsidies, which are miniscule in comparison with those supporting the established fossil fuel industry? Seems you are not being objective here, nor acknowledging the embedded costs to society in health and climate related issues from burning fossil fuels for energy. Those electric cars are not being powered by electricity by coal in most jurisdictions in the world now…Ontario being just one example….and range anxiety is rapidly being made redundant. Wind & Solar are cost competitive with natural gas already, with barely any subsidies impacting this….and the fuel source is free forever and infinite. Get with it Pat……you might be stuck in the past on this topic.
Thank you, Don, for sharing. Good points.