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Beware of the Fad

The craze over recent weeks has undoubtedly been around Nintendo’s Pokémon Go app for smartphones. For those, such as myself, unfamiliar with the concept, it consists of catching mini-cartoon figures in real life locations using the phone’s camera setting.

I must say I found it funny seeing groups of people in Valletta gathered close to insignificant columns, scotched to their smartphones all zigzagging right to left trying to catch their Poke-figures. I sadly must admit a few were close friends of mine.

In fact when I first heard of someone speak of a Snorlax, I thought they were talking about sleeping pills, little did I know it was a Pokémon.

Fads come and go, yet when one sets in, the excitement around the concept propels people to believe it’s the next best thing. It could very well be as historically seen with many Apple products, predominantly the iPhone, whose success to date this week puts it on the verge of exceeding 1 billion sales thanks to its most recent SE model.

In Nintendo’s case, upon announcement and release of the Pokémon app, shares went on to rally after July 7th up to +111.97%, a mind-blowing profit for all those already holding the stock. Yet the buildup was gradual as more and more investors were clung to believe the recent fad could see Nintendo’s business soar going forward. Everyone wanted in on the rally and the stock reached a high on the 18th of July.

The following, to date, was a sharp drop of -31% in the stock brought on by a company announcement stating the Pokémon app would have limited impact on its financial position. Many analysts identified the stock as overinflated, and whilst many professionals may have made short term gains off the subsequent rally, many inexperienced investors could have seen losses off their investments, especially if they invested towards the later end of the rally.

The above highlights the crucial considerations of Fundamental vs Technical analysis one must take prior to investing in a position. The experienced investor may have entered into the rally early on, with an objective set to benefit off the short term price volatility. Not much fundamental analysis goes into such a decision as the decision is based solely on market movements studied through technical analysis.

For the investor wanting to benefit off long term gains it’s beneficial to study and understand the company’s underlying financial position, such as earnings, liquidity, debt ratio, revenues and cash flow generation. The belief Nintendo is the next big fad should be supported by company announcements, financial positions and key ratios such as the P/E ratio which in this case analysts found to be over inflated.

Thanks to innovation and the fast paced technology market, there will be many more opportunities going forward to experience price rallies in such stocks on beliefs of the next big fad.

Investors should by all means participate, but keeping in mind and understanding their short vs long term investment needs. This will determine the difference between making a smart profit and an irresponsible loss.

This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.  

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