The ’80s were a time of both trendy fashions and trendy investments.  Flashback photos of us committing ’80s fashion suicide with our mullets, shoulder-padded shirts, Members Only jackets, and acid wash jeans – all in one dressing no less – are always good for a laugh.  What were we thinking?!

The ’80s also were a time of trendy investments, but unlike trendy fashions, these investments were no laughing matter.  Trendy investments, like junk bonds, destroyed lives.  What were we thinking?!  Just think about it.  How did people ever get on board with investing in junk bonds? 

The name tells you all you need about the quality of these investments, but this didn’t stop investors from snapping them up.  Why?  Because of hype and because of interest rates exceeding 14%. That’s why.  Everyone was doing it and they received so much hype in the media and in financial publications that many investors fell for the hype.  The market for junk bonds eventually bottomed out, people lost billions and the ringleaders over-hyping them went to jail.

Everyone wants to invest in the next hot thing but you want to make sure you’re investing in a trend and not a trendy investment.  

WHAT’S THE DIFFERENCE? 

Trendy Investments:

Trendy investments like junk bonds in the ’80s, dot-coms in the late ’90s, asset-backed securities in the mid-’00s were incredibly popular at the time.  They all received a tremendous amount of hype in the press – triggering feeding frenzies to invest in these trendy investments.

Besides hype, these trendy investments had other things in common.  They were all short-lived but characterized by irrational enthusiasm – like the teen girls in the audience of the Ed Sullivan Show when the Beatles invaded.

This excessive enthusiasm also meant inflated values that investors were more than willing to pay in the heyday, but that bottomed out once enthusiasm waned or the truth about the underlying economic fundamentals was exposed.

Junk bonds crashed when the companies issuing them started to default on them at alarming rates.  Investors soon realized these bonds were indeed junk.  The dot-com bubble burst once savvy investors started questioning valuation and the underlying fundamentals of these dot-coms.

What was driving the inflated prices of these dot-coms?  Was it profitability?  Was it strong economic fundamentals to support future, sustainable growth?  

When confronted with these questions, most dot-com’s were not able to answer in the affirmative.  And we all know why asset-backed securities triggered the global financial crisis.  Many of the assets backing these securities were subprime mortgages.  When borrowers started defaulting on these mortgages, these securities became worthless – triggering one of the worst stock market crashes in history.

Investment Trends:

Investment trends, in contrast to trendy investments, are enduring and have far longer lifespans.  Investment trends point to a paradigm shift in the market that satisfies fundamental needs like shelter, communication, food, business productivity, health, etc.  In other words, they’re driven by a consumer need that is expected to gain momentum over time. Trends guide the future.

To distinguish investment trends from trendy investments as yourself these questions:

  • Does the investment fulfill a major need?
  • Do the underlying economic fundamentals support sustainable profits?
  • Who is investing in the asset?

Case in Point – Bitcoin vs Commercial Real Estate

I’m gonna pick on Bitcoin for this case study.  I’m gonna contrast it with another investment that can potentially shape the future – residential assisted living (RAL).

Does the investment fulfill an essential need?

The verdict is out on whether Bitcoin fulfills an essential need.  Most people are able to buy and sell online using traditional currency through their banks and financial institutions.

I’m not sure Bitcoin fulfills an essential need – especially since it doesn’t have the backing of any government and isn’t insured.  Its touted security through underlying blockchain technology and anonymity has already been compromised by hackers, and other crooks, who have figured out ways to steal what was touted as theft-proof.

In contrast, investing in residential assisted living fills a lasting essential need for housing and on-site physical and mental care for those in need.

Do the underlying economic fundamentals support sustainable profits?

Like gold, Bitcoin just sits there.  It has no intrinsic value.  Its value is based purely on what the public is willing to pay for it on any given day – spiking and dipping based on current hype and investor sentiment and interest.

The underlying economic fundamentals of RAL supporting long-term sustainable profits are solid.  There is an impending senior housing boom driven by a massive aging population that is expected to last for decades.

Here are the major statistics.  Baby boomers are retiring by the millions and by 2050, the 65-plus age group is estimated to equal 88.0 million, nearly double its current population (49.2 million). Additionally, by 2056, the 65-plus age group is estimated to be larger than the population under age 18.

The massive population of retiring baby boomers along with improved life expectancy from modern medicine and healthy nutritional habits are the driving forces behind the impending senior housing boom – especially in the RAL sector where many of these retirees will require memory and medical care.

Who is Investing in the Asset? 

Who is investing in the asset will tell you a lot about the potential longevity of an investment.  Bitcoin investors are often young and speculative.  They’re looking for the quick buck and if things don’t work out, because Bitcoin is liquid like stocks, investors can bail at the drop of a hat.  The hype surrounding Bitcoin may already be waning.

Investors in RAL are not speculators.  Speculators are looking for a quick turn around.  It’s hard to speculate on something like RAL when typical holding periods are 5-7 years.  That’s why investors in RAL are typically more sophisticated, have high net worths and, are savvy.

These investors do their research and conduct their due diligence.  They are not risk-takers.  They are risk mitigators.  

They minimize risk by taking a multi-tiered diversification approach – investing in a range of property types, sizes, conditions, and geographic locations.  This allows them to maintain cash flow in good times and bad.  Bitcoin speculators could care less about cash flow.  They’re more interested in a quick flip for a profit.

When presented with a new investment opportunity, ask yourself honestly what your investment objective is and whether the opportunity matches your objectives.  In answering this question, ask yourself honestly if you’re a speculator or a true investor.

WHAT’S THE DIFFERENCE?

Speculators …

  • Buy or sell because they sense a price movement for some reason (market/sector news, internet hype, etc.).
  • Are interested in profiting from a price movement and, most likely, selling and moving on to the next big stock.
  • Have no real interest in the company behind the opportunity or any underlying economic fundamentals for that matter.

Investors …

  • Do a thorough financial, market, and company analysis to determine an investment’s profitability and sustainability.
  • Identify whether the investment meets an essential need for the general public and not just a niche demographic.
  • Look to the long-term prospects and viability of a company.

If a particular investment opportunity appeals more to your speculative instincts, chances are it’s a trendy investment like Bitcoin, CBD, blockchain, drone delivery, or the next hot stock (Instagram, Snap, etc.).

On the other hand, if an investment appeals more to your investor side, chances are good that you’re dealing with an investment trend.

Predictability may be boring but investing in the right trend that has lasting power will result in predictable profits.  Several current trends in real estate, like RAL, are poised to have long-lasting power as baby boomers retire in droves.

Investors who invest in the long-term look at underlying trends and fundamentals that speculators who chase trendy investments ignore.  That’s why investors with a long view are unfazed by market movements.  They always keep their eye on the prize, and in the world of real estate, prizes like trending RAL assets will be profitable for years and years to come.