Fool's Eye View

[ July 5, 2000 ]

Investing as Entertainment

By Stuart Watson (TMFTiger)

Potters Bar, Herts -- I recently finished a book about the entertainment industry and how entertainment itself is seeping into every aspect of business these days. This website is a perfect example. You would not keep on coming back if you didn't enjoy your Foolish experience. But this phenomenon is much more widespread. The retail industry is a perfect example. It is no longer enough to just offer the goods that people want. They have to enjoy their shopping experience as well. We now have video screens playing the latest pop videos and book signings by celebrities. Entertainment is big business, and it is becoming bigger by the day.

Hit me!

Part and parcel of the entertainment business these days is the "hit", a concept that effectively becomes a money-spinning franchise. The movie Titanic is often used as an example. It was at the time of release the most expensive movie ever made, but it has generated revenues far, far in excess of its costs. But for every hit there are many failures. The big bosses of the entertainment world know this but they can't tell in advance what is going to be a hit and what will fizzle away into nothing.

Therefore they play the numbers game, churning out lots of products knowing that one or a few hits will wipe out the losses of all the failures. It is a risky ploy, but it seems to be working, at least so far. It strikes me that the investment world, especially in terms of technology stocks, is heading down the same road.

I think there are two main reasons for this. First of all there are more new investment opportunities than ever before whether it is in the Internet, telecoms, software -- the list goes on and on. Secondly the demand for stocks is changing. For many years the demand consisted of dour-suited men in the City. But the private investor is growing in importance as more and more people realise that they need to take an element of control over their financial affairs.

Part of the reason we all invest is, let's be honest with ourselves, because we enjoy it. No one would actively manage their investments if they didn't get some sort of buzz out it. It is the thrill of spotting an investment in its early stages, or one that has been cruelly overlooked by the market.

The role of the 'Alpha'

A key element of the hit process is the alpha consumer. The ones that try out products first and spread the word if they like what they see. The world of Internet review sites is becoming a key part of successful movies. You probably have someone in your office that has to have the latest mobile phone. They are probably chatting away on their WAP phone as you read this. No doubt they have an irritating tune on it as well.

The investment world is heading down that road. The resident alphas are the tipsters and pundits in the press and on TV. In fact we could count ourselves to some extent as well as respected posters on our discussion boards. Rightly or wrongly, these views carry weight and influence opinion.

Shares then become hits. Companies like Baltimore Technologies (LSE: BLM) and Geo Interactive Media (LSE: GIM) have no doubt benefited from this. But is this a good thing? Or will it all end in tears? The private investor is in a different position from the media mogul presiding over an entertainment empire. For one thing we only have a limited amount of shots, the mogul has a never-ending supply of new ideas. But private investors can be more selective. The question is of course, how good are they at exercising their powers of selection.

Should you play the game?

The traditional side of the investment business abhors the way the game has changed. But the high prices of shares can be equated to the spiralling cost of movies on special effects and star actors. It goes with the territory. If you want to take a seat at the table you have to pay the entry price. The success of the few drags up the price of the also-rans as well. It is a bit like a second-rate Premiership player getting paid thousands a week, because the very best get paid tens of thousands a week.

So should you play? I think we should approach investment as we approach any other game. First of all we need to understand the rules and the underlying tactics. Then we need to ask ourselves whether the game will play to our strengths or merely expose our weaknesses. There is no shame in not playing. In fact knowing when not to play is perhaps the most important decision of all. I'm a great believer in the fact that there is no "right way" in investing. We're all different. In fact that is the core of the Motley Fool. It is about working out what is right for you and then acting upon that information.

At least we all have a get-out clause, and quite an attractive one at that. We can still make a sufficient return from an index tracker, if the long-term pattern of historical returns continues. If you don't think you have a good chance of beating the market, why bother losing money finding out that your suspicions were correct?

Where Next?

Take a look at our Investment Psychology discussion board.