History Rhymes in the Stock Market Too

Far too often Wall St is left red-faced at the same sequence of events. It starts off with a new company hitting the scene that brings a new way of doing things – a disruptor. The company does well initially, with high-growth and strong prospects. But here’s the thing investors forget almost every single time – competition. We live in a free market economy, meaning that anyone can open a business at anytime. One sure-fire way to draw competitors is being successful. A new company which is doing well will inevitably draw in a bunch of copying ‘entrepreneurs’ – competitors. However, investors don’t think about this until it’s much too late, despite all the clear warning signs along the way. These other competitors will go public, and investors will buy up and sing praises of these competitors without realising that these companies are all in competition with each other. This is where protection from competition comes in. If the initial company has protection, it’ll get far fewer competitors, because competitors can’t replicate them – like Facebook. If the initial company has no protection, you’ll see a swarm of competitors popping up all over the place – like Vaping, Buy-Now-Pay-Later, Electric Vehicles, Cannabis. Yet, on Wall St, the more competitors that come up, the more hype is generates for the industry and all the competitors get these huge stock market gains. This story always ends in tragedy – just look at the stock charts of Cannabis companies. Even the very same Electric Vehicle companies whose stocks have been booming over the past month, their stock charts will show you that a couple of years ago they all had meteoric rises and eventual even-larger collapses. Essentially, one way to tell how strong a new company’s protection from competition is – look at how many similar companies pop up after them. So don’t buy into the hype unless you can justify it with your valuation – which, due to the astronomical valuations these companies always sit at, is near-impossible to do. Besides, if you buy into these hype trends and feel the inevitable hurt afterwards, you won’t feel up to laughing at those who did.