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I'm an avid reader and writer, so I frequently fall into a trap that scholar and "Black Swan" author
In short, we string together factoids and events to weave a clever story that seems to be true and certain, when, in fact, it's just a lot of noise.
It's important to acknowledge this risky way of thinking in all areas of life, but particularly when it comes to investing.
As money manager and
Investors tell themselves stories all the time, about why a certain product is a sure thing or about why a certain CEO is an innovator bound to succeed. But while sentiment like hope and optimism certainly can move stocks in the short-term, all stocks inevitably trade based on the underlying profits of its business and the value it creates for shareholders.
The story is nice, but the raw numbers matter much more in the long run.
Many investors, however, can't help but be taken in by the stories financial media have woven lately about some of the "next big things" that are out there. They pooh-pooh things like revenue and profits, betting instead on the narrative that's spun about disrupting the competition or creating a whole new market segment.
That kind of thinking often ends badly. And to prove it, here are three "next big things" that haven't lived up to the hype so far in 2014.
Marijuana stocks
For those dreaming about a legalized nation, much of the hype about marijuana stocks in 2014 is just a bunch of stems and seeds.
Sure, public opinion polls have shifted sharply in favor of legalizing marijuana use. And, yes,
But just because the business of marijuana is now moving into the mainstream, that doesn't mean that these businesses will succeed -- or that any that do will be good investments.
Consider the fact that many banks are reluctant to provide financing and support to marijuana businesses because of the risks and stigma of the industry.
Of course, that hasn't stopped investors from piling into unprofitable micro-cap marijuana stocks with almost zero revenue.
To add insult to injury, these picks are easily manipulated, thanks to their low volume and stock prices of only a few pennies per share.
I won't name names because I refuse to give any of these risky marijuana penny stocks any more ink than they have already gotten in the financial media as of late.
But the fact that some of these stocks are down as much as 60% since their February highs shows just how quickly this "next big thing" is burning out.
Time will tell whether there can be a viable marijuana industry in the U.S. But it is highly unlikely that micro-cap penny stocks languishing on the pink sheets are going to be the companies that emerge as the market leaders in the years to come.
Fuel-cell stocks
In 2013, electric-vehicle manufacturer Tesla (TSLA) lit the world on fire. The stock more than quadrupled on the year as the company posted its first quarterly profit, repaid its government loan nine years ahead of schedule and enjoyed great reviews and a big backlog for its Model S sedan.
After the stock took off, however, investors quickly began looking for "the next Tesla."
What they latched onto were fuel-cell stocks.
It made sense: Just like hybrids went mainstream and now plug-in EVs are going mainstream now, hydrogen fuel cells should be the natural next step for the auto industry.
Stocks in this segment took off to start the year, with
The problem? Well, both
After the 11-fold increase for PLUG,
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Investors can (and should) debate whether Tesla is fairly valued or whether sentiment has gotten ahead of sales or future profit projections.
But if you doubt the narrative behind Tesla, which has proven it can create good products that consumers demand even if the valuation is stretched, then you should have some serious questions as to why in the world we should be bidding up hydrogen fuel cells as the "next big thing" when we have nothing but a hopeful narrative to go on.
3D printers
One of the big stories of the past few years has been the rise of the robots, and the risk of high-tech workplaces that use more automation and fewer human beings as a result.
Heck, The Economist even writes that writers aren't safe from the rise of the robots -- perish the thought!
So it's natural that amid this backdrop, 3D printers became the next big thing for investors. After all, it's the perfect solution to the current economic environment: cheap automated labor, on-demand manufacturing to reduce waste and "right-size" production and the ability for one machine to produce a limitless variety of items.
Furthermore, consumers with a 3D printer could cut the middle man right out of the equation. Imagine, with one of these gadgets, you could "print" nearly any household object you need with no shipping costs, labor costs or mark-up!
It sounded like a sure thing. So from
But here's the thing: Those dreams don't meet with the reality of 3D printing at all. The machines themselves remain pretty expensive, the blueprints and materials are still a bit unreliable, and the actual process of printing a complex part can take hours and a complex finished product could take days.
The expectations were big but the realities have been pretty bleak, so VJET, DDD and SSYS are all off between 25% and 60% in 2014 as a result.
I'll admit, I am amazed and encouraged by some of the 3D printing trends out there. The story of cheap, 3D printed prosthetics helping people around the world is inspiring.
But does that mean investors should bank on 3D printers being the next
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