Don't Try to Profit Off the Next "Big Thing"
Imagine there is a new bow and arrow target range in town. It is a special target range where you can’t see the other participants unless they hit the bullseye. Whenever this happens, the camera turns on showing the skillful archer, and everyone cheers. Of course, we have no idea how many other archers there are, nor how many arrows each has shot before they finally hit the bullseye. We only get to see when they win. But each time the winner is flashed it gives you the feeling that the next bullseye is within your grasp.
This is a lot like investing. Most people aim for the bullseye. They try to predict the next big thing. And of course, we are sure to hear about their incredible accomplishment if they do. I know of someone who purchased Tesla early and used their hilariously good investment returns to buy a Tesla Model S. If you hit a bullseye in investing, not only do you make money, but you get confirmation of your supposed brilliance and the admiration of your friends. But attempting to predict the next big thing is a surprisingly poor strategy for investing.
In 1999, Warren Buffett stood before a group of executives and CEOs from the top companies around the country. It was the height of the tech bubble (of course nobody knew that) and Berkshire Hathaway had deeply underperformed technology stocks for the last several years.
In his speech, he pointed out that when the car was invented it could have been obvious that cars would shortly replace the horse and buggy. It is intuitive to think that investing in cars would’ve been a good idea at that time. However, there were two thousand auto companies. Out of the two thousand, only three survived. The three that survived massively underperformed the market. He pointed out that autos had an enormous impact on the world but a poor return for investors.
The next great invention of the century was the airplane. However, there were over 200 airplane companies in the 1920s and 30s. Again, the impact on the world was incredible, but as of 1999, anyone who invested in an index of airplane companies would have made a 0% return on their investment.
When it comes to investing, hitting bullseyes is extremely difficult and involves a lot of luck. Just because you correctly anticipate "the next thing" doesn't mean you'll actually turn a profit from it. Rather than taking one shot at a time with an arrow, we'd rather spray the target with a shotgun.