Sentiment Analysis and Trend Investing

Although I’ve been a stock operator for many years, I’m just beginning to learn the psychology of trend investing.  When I say trend, I don’t mean 2 months, I mean a few years.  Trend investing is all about new ideas and the ability to take advantage of the information gap.  When a new idea hits the market it’s rarely understood, analysis regarding the growth potential varies substantially from person to person and firm to firm.  Being a successful trend investor is about recognizing the potential of these ideas before the masses, having an open mind, and reading the tea leaves.

I’ve noticed a few specific things that are always present throughout the life of a great trend.  The first, people who say they fully understand the idea and believe it’s any one of the following: stupid, ridiculous, pie in the sky, never gonna work, won’t catch on, too expensive.  There are haters in every great trend, you need to see them, because it means that the valuation gap is still present.  At the moment I see plenty of these trends, the most obvious one being the broader stock market.  Many just still don’t believe the market should, can, or will go higher, for whatever reason.  I see it in many individual publicly traded companies, many with huge short interest like Green Mountain Coffee Roasters $GMCR, the guys who make the Keurig coffee machines.  I’m long that stock and it goes higher on the back of the haters.

There are so many haters of location based services like FourSquare.  This is a monster trend, one that is in batting practice! Location based hasn’t even thrown the first pitch, it’s less than two years old!  And you know what, one of the major reasons why it’s a great investment right now is because there are so many who either don’t understand or don’t believe.  FourSquare is going to get a venture investment soon that values it between 80 and 100 million dollars.  If I had the opportunity to invest in that round I’d pour money into that business.  I won’t write about it here, I’ve talked about it in the past on this blog, go search for it.  My point is that I know it’s going higher, I know it’s going to succeed because there are so many virulent haters, people who can’t believe people will check in to places they go.  These people can’t wrap their heads around the fundamental idea, for whatever reason.

What’s the flip side of this?  It’s time to cash out when the hype really kicks in, everyone believes it’s going to cure cancer, and the haters all disappear.  At this point the business or stock is fully valued, people understand the idea and how to value it, investors begin chasing returns.  Getting out is far harder than getting in, primarily because you never want to leave money on the table when you’ve hit a great trend, and it’s hard to divorce yourself from someone or something which has shown you so much success, that’s just natural.

No one catches every trend, a venture capital or angle investor will be lucky to hit a few big ones in their life time.  A stock operator has to have a better win percentage, but because of liquidity in the public markets it is far easier to cash out and move on to looking for the next trend.

So to conclude, if you believe in an idea, a trend, a stock, look for the haters, they should give you conviction.

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