The drive to run with the herd is built into all of us. It’s natural and normal, and it’s an essential survival skill in nearly every aspect of life. Among the few exceptions is in the realm of finance, where running with the herd can lead to bruising financial losses.
That’s why all investors should study the great contrarian thinkers: Sir John Templeton, Benjamin Graham, Peter Lynch, Warren Buffett and Charlie Munger, and so on. They built their wealth not by following or even by leading, but by seeking out great opportunities where others aren’t looking.
This, then, leads us to a crucial concept: If you want to grow your wealth over the long haul, invest in sectors and businesses that people aren’t talking about today, but everybody (or at least the mainstream financial press) will be talking about in a few years.
That’s easier said than done, of course, but it’s a skill that can be mastered. Here’s how I like to think of it: If an investment idea is already on the front page of the most popular financial websites, and your uncle or your Uber driver or your co-worker at the water cooler is talking about it, then the lion’s share of the gains are already in the rear-view mirror.
Not only that, but the topping process is probably already underway and there’s much more room below than above. To give you an example, consider the SPAC mania of 2021. SPACs are special purpose acquisition companies, which are basically just shell companies with no business operations, but which can help a start-up business get a public listing on a major stock exchange.
SPAC stocks were all the rage last year. It seemed like there was a new SPAC popping up every day, and their stocks were going through the roof. It was a speculative frenzy based on hope and hype, as many of the start-up businesses merging with SPACs had no profits and were burning through cash like there’s no tomorrow.
IPOF stock chart. Courtesy: Yahoo Finance
Here’s an example of a SPAC stock that bubbled up and then burst in early 2021. It’s called Social Capital Hedosophia Holdings Corp. VI, and the stock ticker symbol is IPOF. People had high hopes for IPOF, even though the shell company hadn’t even identified a merger target yet.
Think about that: Traders were bidding up the stock like crazy, without even knowing what kind of business they were potentially investing in. Even to this day, Social Capital Hedosophia Holdings Corp. VI hasn’t identified a merger target, and folks who invested at the peak of the hype phase are still left holding the bag.
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Another example would be digital real estate stocks. At one point last year, it seemed like all of the financial pundits were saying that everybody and his uncle would buy their next home online. Stocks like Zillow (Z) and OpenDoor (OPEN) doubled and tripled in price within a matter of weeks.
By now, those stocks have coughed up all of their gains; easy come, easy go. The same could be said about meme stocks like GameStop (GME) and AMC Entertainment (AMC). In every instance, getting into the trade after hearing the mainstream media declare that it’s the “next big thing” meant potentially losing your shirt.
MP stock chart. Courtesy: Yahoo Finance
Instead of chasing trends, you can consider investing in sectors and companies that you expect to be high-demand at some point in the future, but which few people are talking about now. An example would be MP Materials, whose stock chart is shown above.
MP Materials is a Nevada-based rare earths miner. The U.S. needs rare earth materials, and the government isn’t going to want America to depend on China for these materials. Therefore, while MP stock is down, it could make sense to buy a few shares with a five-to-ten-year time horizon.
Another example would be Lidar, which is the sensor technology that’s used in self-driving cars. Not too many people discuss Lidar around the coffee table nowadays, so if you envision a future for this type of technology, then you might want to look at companies like Luminar (LAZR) and Velodyne Lidar (VLDR).
A couple more examples would be Lithium Americas (LAC) and Piedmont Lithium (PLL), especially if you expect that large amounts of lithium will be needed for electric vehicle batteries over the coming years. These are all high-risk but possibly high-reward bets on what could be hyper-growth industries.
But of course, don’t invest in anything just because I mentioned it. Now it’s your turn to conduct your own due diligence, and discover great companies that most people won’t know about until the opportunity has already passed.
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