Investing in fads like Bitcoin or Marijuana stocks: Quack like a duck and you may get plucked

By Steve Lowrie

Special to the Financial Independence Hub

It’s now been nearly a decade since investors have had to face down a bad bear market. Long enough, apparently, that many have forgotten how painful that can be. Maybe that’s why I’ve been witnessing what seems like an uptick of speculative excess lately – aka, fad-chasing.

For example, there’s been performance chasing in real estate, and continued stockpiling of high-dividend stocks. At least these qualify as legitimate asset classes if they’re sensibly incorporated. In an increasing bid to turn up the heat, I’ve also been seeing investors bedazzled by far riskier ventures ranging from cryptocurrency to cannabis. This, despite decades of evidence suggesting what the future has in store for financial fads. A few lucky players make a fortune, but the vast majority who pile in after the run-up is noticeable are far more likely to be left holding the bag.

When the ducks quack, feed them

Everyone seems to have forgotten how risky a hot hand can be. Everyone, that is, except the Bay Street and Wall Street denizens who have a saying for these sorts of speculative runs: When the ducks quack, feed them. Meaning, as one source has described, “when investors want to buy something … that something is offered for sale. It doesn’t make any difference if Wall Street knows in its heart of hearts that that something (such as an IPO) is overpriced.”

Make no mistake. The typical Wall Street brokers and Bay Street bankers are no fools; they are opportunistic. If they see a chance to make easy money on a hot-hand trading frenzy, they’re happy to help you get in on the action. Whether you win or lose on your trades, they come out ahead on the transaction fees involved.

Likewise, the popular financial press makes its money by capturing your interest; not by advising you according to your highest interest. Case in point: As I write this post, the Yahoo Finance feed is prominently displaying Bitcoin pricing ahead of the Cdn/US dollar exchange rate and major international market returns. It’s also awash with ads promoting Bitcoin and other cryptocurrency for sale. So much for objective reporting.

As Reformed Broker Josh Brown once said: “The more you read about Wall Street history, the more you recognize it as the world’s most elaborate petting zoo – lambs, ducks, goats, cows and pigs herded into pens so that bankers and brokers can feed them pellets right from their hands. We are fed until the bursting point, we almost never walk away on our own.”

So before you decide to buy cryptocurrency, cannabis, or whatever is the next craze to come, here’s what I would suggest you do first: Think it over while taking a good long walk – most likely in the direction of “away.”

It’s hard to ignore all the recent commentary on bitcoins, block chains and cryptocurrency. But why all the buzz about these relatively new buzzwords? Should you buy some bitcoin to have and hold? Should you invest in it? What is “it” to begin with?

Fortunately, my colleagues at Dimensional Fund Advisors have published a handy, three-page piece on this very subject: “To Bit or Not to Bit: What Should Investors Make of Bitcoin Mania?”

Having done my own due diligence and reached essentially the same conclusions they did, I’m going to share their article here, with permission. It’s an approachable piece, worth your time to read, but if you’d rather jump straight to the conclusion, here it is:

Because bitcoin is being sold in some quarters as a paradigm shift in financial markets, this does not mean investors should rush to include it in their portfolios. When digesting the latest article on bitcoin, keep in mind that a goals-based approach based on stocks, bonds, and traditional currencies, as well as sensible and robust dimensions of expected returns, has been helping investors effectively pursue their goals for decades.

For additional insights on how cryptocurrency fits into evidence-based portfolio planning (which is, to say, how it mostly doesn’t seem to fit in at this time), read the rest of Dimensional’s article here.

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” The top half of the above blog originally appeared on his site on February 2nd and the second half (the Q&A) on January 6th. Both are republished here with permission.