Identifying the Next Big Trend Is Not Enough to Win

Pretty much everyone wishes they could predict the future. A window into the world of tomorrow could give profound -- and profitable -- insights into how to allocate capital today. For the most part, the future sneaks up on us and we adapt as it happens.

There are a few folks out there who have managed to see ahead -- at least to a degree. Literature and analyst reports are littered with broadly accurate predictions of trend, market and technological developments. Unfortunately, even such prognosticators are limited. Correctly predicting where the world may be headed, or identifying the next big trend, is not enough to profit.

Below are some of the pitfalls of trying to invest in the future.

“Too early” can mean “wrong”

The first thing to understand about identifying and profiting from major shifts in preferences, economic changes, new technologies and so forth is that, even if one is absolutely right about an emerging or future trend, it means nothing if one gets the timing wrong. JPMorgan’s Marko Kolanovic made this point very effectively:

“I do tend to be a more contrarian person who looks at things that people aren’t looking at right now—which is good and bad. It’s good because you can uncover things that nobody thought of, and they become very relevant. The bad is that you may be sometimes looking too far out, and then it’s not relevant. If most people don’t look at something, chances are it isn’t going to be relevant very soon. ‘Too early’ sometimes also means ‘wrong’ in finance.”

This is a great challenge facing forecasters. Timing something is much harder than seeing a general trend, or even spotting a future step-change in advance. One can lose a whole lot of money due to poor timing -- even if they got the trend right.

First mover or last man standing?

Beyond timing the trend, there is also a challenge of finding the right business. A sentiment seems to have built up in recent years that being first to market creates a sustainable advantage. We are hardly going to challenge the notion of the first mover advantage. Yet, in many industries, especially those reliant on emerging technologies and innovations, the last man standing is often not the first to market. We came across a remarkable book review recently that illustrates this issue quite well:

“Bill Gates (Trades, Portfolio) was not the first & only Gates, he was the last Gates; many people made huge fortunes off OSes, both before & after Gates - you may have forgotten Wang, but hopefully you remember Steve Jobs (before, Mac) & Steve Jobs (after, NeXT). Mark Zuckerberg was not the first & only Zuckerberg, he was the last Zuckerberg; many people made fortunes before him - maybe Orkut didn't make its Google inventor a fortune, but you can bet that MySpace's DeWolfe & Anderson did well. & there were plenty of lucrative search engine founders.”

In many tech businesses that rely on network effects, there is usually a player that comes out on top. Alphabet Inc. (GOOG, Financial) dominates search engines with Google. Facebook (FB, Financial) has achieved similar status in social networking. But they emerged in the midst of other search engines and won. Predicting the emergence of big search engines and social networks would not have been enough. One had to pick the particular company that would crush its rivals. That is a feat easy only in hindsight.

The perfect moment

Countless innovators and would-be disruptors have created companies with offering much like we see today, but they failed because the time was not right. It may be true that nothing can stop an idea whose time has come, but an idea whose time has not yet come is a lonely thing indeed. And the window in which an idea can take flight is often very narrow, as our intrepid book reviewer eloquently points out:

“A good idea will draw overly-optimistic entrepreneurs to it like moths to a flame: all get immolated but the one with the dumb luck to kiss the flame at the perfect instant. (How many payment startup were there before Paypal? How many social networks before Facebook? How many search engines before Google?).

“Many startups have a long list of failed predecessors who tried to do pretty much the same thing, & what made them a success was that they happened to give the pinata a whack at the exact moment where some cost curves or events hit the right point.”

Sometimes the perfect moment is a matter of serendipity. And that is one of the most infuriating aspects of trying to invest in these sorts of bleeding-edge companies. The technology may be good, the management may be good, but the moment may be slightly off. Then, a single shift can make it work and another company reaps the benefits.

Invest carefully!

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