How do you make educated guesses on investing in new industries and which ones are going to pay off?
In the early fall of 2019, I got an email from a client asking whether Beyond Meat, a young company in the new “meat alternative industry,” was a good investment opportunity for her. The stock was all over the news. The company just inked a deal with McDonald’s’ to feature their product in some new menu items. Beyond Meat stock, at the time of the article she forwarded to me, was up 11% on the news. Since then, the stock has been up and down and sideways (mostly down, but that’s not the point of this article).
This happens when competitors come and go, new versions of the technology emerge, and the market tries to figure out what meat alternatives might mean to the future of our economy.
How do you know when investing in new industries is a good idea?
Questions about investing in new industries come up a lot, in one form or another. The answer, from my point of view, is always the same regardless of what the new industry, technology, or company does. While there may be a lot of money to be made investing in new technology, trying to pick the right company out of the current pack of startups can be nearly impossible. Imagine trying to pick Apple or Microsoft out of all the fledgling computer companies spring up in random garages in California during the mid-1970s and early 1980s. Wikipedia has a list of those companies, which is sort of fun if you grew up in that era and may have been a bit of a nerd.
Markets are Generally Efficient
I believe that the markets are generally efficient. When we say that markets are efficient, what we mean is that a company’s current stock price usually reflects the average opinion of all the buyers and sellers out there. It incorporates all the known information about the company. That is true for new companies and industries as well. However, there is more room for traders to be wrong because there is less data available.
For Beyond Meat, the stock price the day before the McDonald’s deal was announced was based on the data that was available. Some people thought the stock should go higher based on their interpretation of the data, and they were buyers. Other people thought the stock price was too high based on the same data and they were sellers. When the McDonald’s news came out, the price immediately moved higher because the new data indicated the company may become more profitable than previously thought. Was an 11% move the right amount for the price to increase? Good question. Unless you’re an expert in meat and meat alternatives, and how that will translate into profits, your guess is as good as mine.
The Wrap Up
New companies and new technologies grab our attention. They make headlines and convey exciting improvements for our future. However, turning that into investment gains can be another story. One of those companies may eventually dominate the new industry, but most will fail. The new technology itself may fizzle out. When it comes to your financial future, I always recommend you stick with a broad-based approach to investing in the market based on the assumption that beating the markets is about discipline and diversification, not trying to guess the winners and losers.
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