It is human nature to follow fads, no matter how strange or cultish they may seem. Anything from Beanie Babies to cupcakes to even tech IPOs fall into this category, but, ConvergEx's Nick Colas asks, why do some of these trends manage to stick around while others die off? We might laugh now at bellbottoms and the so-called “grapefruit diet”, but at one point in time these were both fashionable – and profitable. So what does it take to make a fad last? Colas looks at a number of quirky trends past and present and importantly for market participants, finds lessons that extend directly to investor psychology and discipline.
Via ConvergEx's Nick Colas,
Note From Nick: In today’s note Sarah addresses the psychology of short-lived trends, the humble avocado, and the challenge of investing. If you have a set of Crocs in your closet, or went to prom in a leisure suit, or are waiting for headbands to come back, please read this note. Please…
Remember when pet rocks were “a thing”? What about lava lamps and mood rings? Bellbottoms and “leisure suits”? If you need something a little more recent to test your memory: how about MySpace and Furbies?
Feeling nostalgic (or more accurately, embarrassed) yet? Don’t be. Consumer research and psychological studies across the spectrum of sectors and disciplines tell us joining in on a fad is a natural and expected human behavior:
First and foremost, following fads is part of human nature from an evolutionary perspective. According to a 1982 paper from Dr. Karl Dieter Opp, we learned to follow trends early on because certain behaviors had been tried and proven to pay off. This goes as much for a caveman’s technique of hunting in groups – for which the “pay off” was most certainly survival – as it does for stilettos or yoga pants in 2013. The payoff isn’t as tangible, maybe, but psychic rewards can feel good too.
Societally speaking, we tend follow trends because of the positive feedback we get from conforming. A paper from Princeton University by B. Douglas Bernheim proposes that societies condone certain behaviors, rewarding and giving high societal value to some while shunning others. We choose to imitate particular behaviors, therefore, based on these expected rewards and responses. In layman’s terms, that’d be equivalent to someone saying “I like your jacket” – your behavior is validated, and you are probably going to wear that jacket again.
Perhaps most importantly, some researchers suggest that the main reason we follow fads is to simplify decision-making. According to a 1998 paper titled “Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades” by Bikhchandani, Hirshleifer, and Welch, we follow others’ direction because we assume they have made the best possible decision. We assume that they faced the same decision we do, with the same information, same alternatives, and same costs/benefits. By following an example, we eliminate the process of weighing the decision for ourselves.
This is the same part of our brains that encourages us to buy the latest fashion trend or to jump on the bandwagon in the market. Our natural reaction is to assume a stock is worth buying if everyone else is doing it; clearly someone knows something good about it, and you don’t want to miss out on a good opportunity. Just like you didn’t want to miss out on the chance of a well-priced sea-monkey colony 10 years ago. The difference is, while we might be willing to admit we made a mistake with the sea monkeys (we did), it’s a lot harder to convince ourselves that we botched an investment.
So if our nature is to buy into fads that might fail, how do we teach ourselves to avoid this pitfall? Behavioral finance research gives the following advice to avoid the “sunk cost fallacy”, or loss aversion:
Know when to let go. You don’t have to be committed to a stock forever just because you feel you’ll have wasted money if you sell lower.
Don’t stress. Everyone makes mistakes, including experienced, professional investors such as yourself.
Separate yourself from your caveperson emotions and think independently. The old saying “Sunk costs are sunk” is painful but accurate. Bad decisions today don’t need to be an even worse decision tomorrow.
Easier said than done: every investor can be headstrong enough to deny that he or she has made a mistake. So to bring this subject closer to home, we want to put it in a more relatable context: how we react to fads. As we’ve said, joining in on a fad is only human – whether it’s the newest toy, fashion, or market trend. But it’s also pretty common to regret jumping on the bandwagon later on.
There are some exceptions, of course.
- 10 years ago the iPod was all the rage, and in 2013 its evolutionary product – the iPhone – still holds center stage.
- Ugg boots first debuted around 2000 and are still going strong.
So-called “superfoods” – the topic of discussion today – are still on the rise after first gaining popularity in the mid-2000s (charts from Google Trends above). Unlike some fad diets or exercise trends, superfoods have gained some real traction that has lasting potential. 10 years ago, you weren’t likely to find kale or Greek yogurt in anyone’s fridge at home, much less chia seeds or quinoa in their cabinets. And yet there they are. What is it about the superfood fad that’s made it outlast trendy diets, weight loss supplements, and even Beanie Babies and bellbottoms?
At the most fundamental level, superfoods share a few key elements with successful fads like the iPod and Ugg boots. Good endorsement is one, of course, but even the best ad campaigns can’t prop up a failing product. Instead, there are a few key elements superfoods have that enable them to succeed, all of which we can attribute to learning more about long-term investment:
1. Simplicity. All of us have seen one version or another of the “get thin quick” diet, where you’re promised 3+ inches off your waistline within a month if you stick to the rules. The Atkins diet, the “Master Cleanse”, Nutrisystem, and weight loss pills are all iterations of this concept. Just eat no carbs – or no solid food, or only the food we give you – and the results are there. Notice something here? All of these trends also require quite a bit of effort on the part of the consumer: rules and exceptions and prohibitions must be observed. It’s no wonder many of them fade out after a while.
The message of a superfood, though, is perfectly simple: eating this is good for you. Nowhere on an avocado or a can of lentils will you see any phrase relating to a “superfood diet”, let alone that the product is a superfood at all. Moreover, superfoods are not exclusionary: choosing to buy a bag of pistachios alongside a bag of potato chips is not off limits. Nor does buying turmeric necessarily mean you’re obligated to buy chia seeds. Superfoods are independent. The same concept goes for the iPod and Ugg boots: they are utterly simple, non-chaotic, functional products. And that’s part of the reason they’re so successful.
The market lesson here: keep it simple. Peter Lynch of Fidelity fame used to say that if he couldn’t describe a business to his six year old, he wouldn’t buy the stock. Part of Warren Buffet’s folksy appeal comes from his message to buy businesses you understand. To borrow from Gordon Gekko: Simplicity, for lack of a better word, is good.
2. Reach and affordability. Superfoods, unlike many fads gone by (remember the “Snuggie” blanket? Neither do I…), catch the entire population in their net: they are accessible at virtually any food market you walk into, regardless of whether it is a health/organic food store or not. Kids, adults, teens, you name it – all of them are the target market of a superfood.
And anyone can buy a superfood. Avocados range from $1-3, quinoa from $2-5, and nuts are usually about $3/lb. Consumers of virtually any income level are capable of buying superfoods at their local grocery store. They will probably buy them more than once. When we extrapolate this affordability concept to the iPod and Uggs, remember: “affordability” is in the eye of the consumer. $100-200 is the sweet spot for iPods and Uggs, but it’s doubtful any avocado would go for that much. Rather, consumers buy these products because the perceived benefits – in the case of superfoods, more vitamins, minerals, omega 3s, etc. – outweigh the costs.
Market lesson: look for the right mix of market reach and affordability. Business models have to provide actual utility to their customers in order to thrive. That utility can be expensive – think Tiffany jewelry – or affordable, such as Wal-Mart. Either way, as with superfoods, the consumer has to feel they are getting real value. Anything else is a Snuggie. Whatever that is.
3. Popularity. According to research from Jonah Berger and Gael Le Mens at Wharton, the quicker a fad is picked up the faster it is doomed to fail. To rework an old phrase, “the quicker they rise, the harder they fall”. Kids’ toy fads are probably the best retail example of one of these fads: sillybandz and webkinz only lasted about a year in the spotlight, according to Google trends search data. They rose quite quickly, as any parent could probably tell you, but (as the Berger and Le Mens research predicts) fell out of fashion just as fast.
The adoption speed of superfoods, by contrast, was years in the making. Dieticians began to identify certain foods that had “more bang for their buck”, or a disproportionate amount of fiber or protein or vitamins for their size or composition. Soon you could find lists of superfoods on the web; next television hosts were doing “top 10 lists” of their favorite superfoods. The movement wasn’t advertised like a diet or weight loss plan, and the trend caught on relatively slowly. The same happened with the iPod and Uggs: not everyone owned them at first, but with some organic growth in the consumer base they became the successes they are today.
Market lesson: anything that comes from nowhere is likely to return to its place of origin. Business models which rely on a one trick pony – no matter how good the trick might be – are at great risk for new competition or the quick shift of consumer tastes elsewhere. Remember the huge crowds at the iPod launch in 2001? There weren’t any – the room at Steve Jobs’ 2001 presentation is half full. Check out the link at the end of this note.
4. Psychological positivity. Finally, superfoods have managed to stick around partially because of how the consumer reacts to buying them. Purchasing a superfood is cognitively positive: the consumer is going to feel better about him/herself for choosing this over, say, a burger. Moreover, that’s a feeling that, if repeated, is likely to last.
Market lesson: The old line about a good investment being a large castle surrounded by a wide moat comes to mind. Competitive advantage drives valuation as much as earnings.
The majority of these “lessons”, of course, are for investors looking for long-term investments. If you only want something for the short term, it’s probably best to focus on the popularity point here: just know that the quicker it rises, the quicker it’s going to fall, so sell when you can, not when you have to.
The bottom line is that we are sometimes blind to our own trading (and fashion) mistakes in the moment, but we are not preordained to make the same errors in perpetuity. Superfoods are an example of how a ‘Fad’ can be productive, harnessing our group instincts to a healthier life. And the lessons from quinoa, avocados and Greek yogurt can apply to better investment decisions as well.
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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/VV2U71FI5tQ/story01.htm Tyler Durden