Trend Spotting: Getting in Early vs. Playing It Safe

Motley Fool analyst Jason Moser chats with Rick Engdahl in a side-of-desk interview about developing a personal investment philosophy, sharing his own four-point system for deciding whether a particular stock is right for his portfolio.

In this video segment Jason discusses the perils of trying to spot long-term trends early on. Did you get burned in the dot-com era? If you want to get in on the next big thing but avoid becoming a victim of the next big bust, start with a small position and stay informed as the industry develops and matures.

A full transcript follows the video.

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Rick Engdahl: If you're looking for long-term future trends, how do you spot those, when they're happening? Maybe you don't concern yourself with that, but do you see something like 3D printing and say, "Oh, I want to be on the front end of that because that looks like a long-term trend," or do you say, "That may or may not pan out, I don't know?"

Jason Moser: Right, well it's difficult initially. If you think about the dot-com bust back in 2000, when every Internet company, it seems, just faded away to nothing, it was really difficult to figure out. The very beginning of that time, where the Internet looked like it was such a big deal -- and obviously it is -- but there were a lot of players taking advantage of that movement.

Rick: Right, but that bust was really kind of a culling of the herd.

Jason: Exactly.

Rick: The story kept going.

Jason: The story kept going.

Rick: It really was a future trend. It was real -- e-commerce, as you said. That's a matter of picking the right companies, but you still spot the trend ahead of time.

Jason: Yeah, and I think that's just it. You spot the trend, and then I think it's really a matter of paying attention to it, and I think it's a matter of learning about it. Just as quickly as you might jump into something because you feel like you know a lot about it or you're very interested in it, you can also jump into something way too early, and it may not really pan out.

3D printing I think is a great example of something that, when the first mention of it came about a few years ago, a lot of people probably thought: "What in the world? There's no way that works in any way, whatsoever. That's just for the movies."

I think it would have been very difficult to pinpoint the winners in that space, and it's still so early in that game, I think that it's very difficult to really pinpoint the winners.

You saw Amazon (NASDAQ: AMZN  ) , for example. They had invested -- or Jeff Bezos had invested -- in a small 3D printing company that was acquired. Then you have Stratasys  (NASDAQ: SSYS  ) and 3D Systems (NYSE: DDD  ) , so those are two companies that are really moving ahead of the pack and consolidating in order to take advantage of that technology that's showing more and more benefits as time goes on.

I think the point that I'm trying to make is really that when you spot a new trend like that, it's not necessary that you jump in immediately. I think, as a matter of fact, that I would advise against it for the most part. If you feel like you need to jump into that immediately to be a part of it, make it a very small position. It's something you buy a few shares of a stock, or a company that you feel like is on the forefront of a new emerging trend, and that keeps you in it. That gets you some skin in the game, and enables you to learn more about it.

As time goes on, if something happens, that loss wouldn't necessarily be debilitating, and you can always add more to it later as your confidence builds in that trend.

I guess that's just the point, right? If it was easy, everybody would be doing it.  So really, I think the key is to read, read, and just keep on reading. I've never known a good investor that doesn't read constantly. For me, that's been the best way to not only learn as an investor, but really to keep on the forefront of things that are changing the market on a day-to-day and a week-to-week and a year-to-year basis.

Rick: That brings you back to the first point there: Enjoy it. Because if you're going to do all that reading, you'd better enjoy it.

Jason: Exactly, right.


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