Market Watch : Make Sure Investment Is Solid and Not Merely a Fad : Wall Street: The financial landscape is littered with products that were once trendy. The trick is to find those with long-term viability.
They are the financial equivalent of the Hula-Hoop or the pet rock--investments that capture the hearts and pocketbooks of the masses before fading into relative obscurity. Let’s call them fads.
From the birth control boom in the early 1960s to today’s “green” investments, the financial landscape is frequently littered with products that cater to the latest social or economic trends.
But fads are risky. Investors sometimes can reap double-digit returns in just a matter of months. Fads can just as easily slide into oblivion overnight, leaving investors holding securities worth a fraction of yesterday’s value.
“The problem is finding out what is a fad and what is a popular investment that has long-term viability,” said James S. Riepe, managing director of T. Rowe Price, a big mutual fund company. “If you happen to pick the fad, it goes down and it never comes back up. You bought the company that made the pet rock and there was no encore.”
In the early 1960s, for example, rumors surfaced that the Catholic Church was planning to curb its stand against birth control. Companies manufacturing birth control pills and other reproductive planning devices enjoyed a dramatic, short-lived rally on Wall Street. But the balloon burst when the Pope failed to deliver the prescribed message.
Decades later, when the AIDS epidemic was young, stock in a few biotechnology companies soared briefly because the firms promised to bring out drugs that could treat the deadly virus. The medications were never proven effective and most of the companies faded; some declared bankruptcy.
Even when an investment’s success does not depend on just one event or product, individuals should consider whether bullish sentiment has pushed the investment’s price as high as it will go, Riepe said. “If you are buying after something has happened, you have to realize that this investment may be at its peak.”
Mutual funds that invest in a single country are one such example. Some of these “country funds” may be great investments over the long haul because the prospects for that nation’s economy and business growth are bright. But because of investor reactions to world events, such as the expected reunification of Germany, some country funds became “faddish,” or popular to a degree that was completely out of proportion to the underlying economics of the investment.
“It became a feeding frenzy,” said Penny Dobkin, manager of the Fidelity Europe Fund and the Fidelity Plymouth Fund in Boston.
The proof: the price relationship between the funds’ asset values and their market prices, Riepe said. (Many single country funds are “closed-end” mutual funds, which issue only a limited number of shares and typically trade on the New York Stock Exchange.)
When the Eastern Bloc was in the news every day and the reunification of Germany became probable, prices of German funds soared. By January, the Germany Fund, which had been selling at a discount to its net asset value, rocketed to $19.25 a share--more than 50% above what its assets were worth. Then, abruptly, the fad faded and shares of the Germany Fund fell into the $13 range until last week’s country-fund rally boosted the price to $15.875 by Friday’s close.
Dobkin believes that the long-term prospects for Germany’s economy are as good as they were in January. But investors need to ignore the effects of the fad and put their securities away for a few years if they hope to profit, she said.
The same thing happened with Korea Fund, which was selling for twice its asset value last September, Riepe noted. Although the Korean economy is promising, at those rates it would take at least four to five years for asset values to catch up to market prices. Market prices have since ebbed, and the Korea Fund closed at $21.625 on Friday.
But country funds are not the only fad in the investment world. More recently, investors started to flock to so-called green companies--those that hope to profit by helping to clean up the environment or make environmentally safe products. Fidelity Investments, for example, introduced an environmental services mutual fund last June. Within a year, investors had poured more than $100 million into the fund.
Although a spokeswoman for Fidelity calls the environment the “issue of the decade,” some believe environmental investing will go the way of bell bottom jeans and “flower power.”
“There is a real question about whether investing in companies that are involved in protecting the environment will survive as an investment segment,” said Riepe. “It is a very narrow segment. . . . There are so few companies involved that you might as well just buy five of those stocks.”