There are hundreds of themes and thousands of fads, but far fewer megatrends. While fads and trends are short-lived and often overly hyped, megatrends are not. Quality, reach and their life expectancy are the differentiators.
Fads
Some clients may be attracted to fads, drawn like magnets towards “investments” based on concept, promise and much hype. They are examples of the get-rich-quick mentality that humans are so susceptible to. Yes, a few people make money, perhaps even a lot of money, but on balance, most do not. Investing in them is speculative at best.
Fads are rarely based on sound fundamentals or pesky financial requirements like profitability. They are likely to explode into pieces with little warning, leaving huge investor losses behind them. Timing when it is best to get in, then out, is crucial but near impossible.
There is a not-so-rich history of investment fads that ultimately turned into duds. Private mortgages, jojoba beans, tulips, crypto, willow trees, nickel boom, ostrich farming and so on.
Trends
Clients will likely hear a lot about trends because they also evolve over shortish time frames which makes them newsworthy.
Lasting longer than fads but far shorter than megatrends, trends are quite narrow and specific themes that possess sound reasons for their being. They usually attract quality enterprises that are investor-worthy, alongside many that won’t be. Like fads however, they also require supreme entry and exit timing. Often, once a trend is recognised and a product built then promoted, most of the opportunity gain may have passed.
Trends may last a few years but are also susceptible to overly optimistic potential, and so prices can rise beyond what an investment in a trend can deliver. A lot of exchange-traded funds (ETFs), for example, are designed to cash in on the hype around theme-based trends. This is why the vast majority of themed ETFs fail to achieve the outcomes they infer – except for the product issuers, of course.
Importantly, both timing and quality risks for fads and trends are high. Both require a degree of speculation, which is partly the reason that short-term gains are greater (if you get the timing right). It is these potentially large and quick gains that attract businesses that aren’t always quality in nature or sustainable, resulting in disappointment for investors.
Most gains from trends come from only a handful of players in an industry. It’s hard to pick the winners among the throngs, so it’s not uncommon for investors to experience high highs, followed by even lower lows and ultimately lose money over time.
Megatrends
Where fads tend to be hype-driven and trends narrow in focus with shortish lives, megatrends are much bigger, longer lasting and game changing across whole swaths of industries and society. The reason most clients won’t hear about them is that while they are large and unstoppable, they are often stealthy and move slowly. Because of this, they are not often in the news.
Megatrends are giant tidal waves of change – slow to form, far-reaching, inevitable, powerful and impossible to reverse. Ultimately, they flood everything in their path. They can significantly impact people and industries globally, permanently changing the world and how we all live and work. Examples are all around us. Some companies that benefit from a megatrend are obvious, but most are more obscure and behind the scenes. These attributes are the very reason megatrends can deliver far more for investors over time, and with less risk.
Megatrends are best explained to clients by way of example. Take the contactless payment megatrend. No matter how many people jump up and down about the disappearance of cash in commerce, it is ultimately going the way of shells and beads. Unavoidable, unstoppable, and inevitable.
The question that needs to be asked is, which companies will benefit from the demise of cash and therefore where are the investment opportunities? PayPal, Mastercard, and Apple are examples, but there are many non-household name businesses within the payment ecosystem playing their role that stand to reap outsized rewards as well.
Other megatrend examples include:
- Workplace automation
- The silver economy
- Pet humanisation
- Low emissions
- Internet of things (IOT)
While it is possible to invest too early or too late in a megatrend, introducing some timing risk, there are effective strategies to mitigate this risk, more so than with fads and trends. It’s crucial to recognise the distinctions among fads, trends, and megatrends, as this understanding underpins successful long-term investing.
A common pitfall for investors is becoming enamoured with a megatrend, leading to compromises in the quality of the companies they invest in, which can result in disappointment. Index products often prove inefficient and disappointing for accessing megatrends. Rather than seeking out funds or ETFs that invest broadly in a megatrend sector, the focus should be on identifying a handful of standout companies. These companies excel in their management, financial health, and ability to capitalise on the megatrend.
Thorough analysis and disciplined selection are imperative, both in recognising the true potential of a megatrend and in choosing the right stocks within it. Even within a megatrend, identifying the winning companies is vital to achieving outsized gains.
Grant Pearson is head of strategy and distribution at Insync Funds Management.
