Beware of Hype

The media loves hype. It is exciting, it is engaging, and it can be quite fun. Who doesn’t want to invest in the next big thing, especially when everyone else is talking about it?

Hype is Alluring

When a company or stock is hyped, it can be very difficult to steer clear.  Our brains are attracted to events that elicit emotions – whether that emotion is fear or excitement.

When something is exciting and everyone is participating, it can be fun to be part of the crowd. It can also, subconsciously, cause us to underestimate the risk of an investment. After all, what could possibly go wrong with something that everyone loves?

Hype Does Not Guarantee Profits

One of the dangers of hype is that it can mask fundamentals. Hype causes us to see things through rose-colored glasses. We dismiss the yellow flags and focus entirely on what we hope about what is being hyped.

WeWork is a great example. Valued at $47 billion in January 2019, it attempted to go public in September at $15 billion (that is right – at a 65% discount). But yet even that valuation was too rich. One month later, WeWork was valued at less than $8 billion. In one month, they lost 50% of its value while the fundamentals of the company did not change. So, what happened?

The hype wore off.

This is a good reminder that hype can mask fundamentals since it is more about emotions, rather than making thoughtful decisions. It is another reason why we should ensure our plan that guides our decisions.

©2019 The Behavioral Finance Network. Used with Permission.

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