Beware the Modern-Day Gold Rush

When everyone is talking about the next big thing in investing, it may be too late to get in on the ground floor.One of my favorite things about living in Austin is being here for the South by Southwest (SXSW) annual conference. Over the years, it’s become a prime venue for announcements about new companies, technologies and ideas. Twitter even launched at SXSW in 2007.I love going to SXSW for lots of reasons. First, I love feeling like I’m in the middle of it all, where the action and the new ideas are. I also like learning about new technologies that may affect the markets and my own firm. And yes, ok, I admit it’s nice to have a change of scenery and get out of the office for two weeks each year. I always get a major rush of inspiration from being in such an exciting environment.Each year, SXSW does a pretty good job of focusing on one hot trend to showcase. Last year, it was cryptocurrency and blockchain. This year's hot trend was cannabusiness -- the businesses of expanding the market for marijuana/cannabis.In both cases, I learned a lot about the way investors are thinking about the future of these two industries. But I also saw how a toxic blend of money, hype and marketing can lead to very bad investment decisions that can hurt regular investors.There’s Gold in Them There HillsYou’ve probably heard about the gold rushes that took place in the western US and Canada in the 19th century. But do you know how few people actually got rich?In August 1896, three local miners discovered gold in a tributary of the Klondike River, way out in the wilderness of northwest Canada. The following summer -- when some of the early prospectors returned to San Francisco and Seattle with their riches -- the Klondike Gold Rush really began in earnest.Roughly 100,000 people attempted to reach the Klondike's remote gold fields. It is estimated that between 30,000 to 40,000 actually made it there. Of those, only about 4,000 reportedly found gold -- and only a few hundred really struck it big.A Modern-Day Gold Rush?Just like the first Klondike miners that arrived in San Francisco, early Bitcoin speculators arrived at SXSW in March 2018 to announce the future of investing. The story was pretty simple: If you wanted to strike it rich, the easiest path was the largely unregulated world of cryptocurrencies. Media outlets and financial publishers quickly picked up the story and soon everyone was talking about investing in crypto.The trouble was, by the time the 2018 SXSW conference rolled around, the Bitcoin boom was fading. Bitcoin’s price peaked in December 2017 at roughly $19,800 per bitcoin. By March 2018, its value was hovering around $8,500. And by the end of 2018, the price of bitcoin had dropped to $3,700. In retrospect, it looks like a lot of people got caught up in a bubble.In 2019, the same type of folks who’d been touting cryptocurrency in 2018 were back again -- only this time they were extolling the virtues of cannabis-based investments. And the story was very similar to 2018’s bitcoin pitch: If you wanted to strike it rich, the easiest path is pot.I was shocked by how similar the message and the timing looked. Once again, by the time the 2019 SXSW conference rolled around, the cannabis boom was fading. Tilray -- one of the industry’s best-known stocks -- went public in July 2018 at around $22 per share. It hit $300 per share by September 2018. By March 2019, its value was hovering around $72. And today, Tilray stock is around $36. In retrospect, it looks like a lot of people got caught up in another bubble.As an investor, I think the cannabis story and the crypto story are both fascinating to watch. But to recommend one or both, I need to understand the relationship between an investment’s price today vs. its potential and profitability in the future.These stories are still playing out. Bitcoin's value today is back up around $8,500, and it could become a viable, widely-used currency in the future. And the expanding legalization of cannabis is likely to create new, profitable, industry powerhouses.But neither will happen quickly, and neither will be easy or painless. Trying to get rich quick on either idea is a no-go in my book.So as a general rule, consider this:When you get a tip about the “next big thing”, please understand that the odds of striking it rich are not in your favor.By the time you hear about the next great investing opportunity -- especially if you’re hearing about it at a large, public gathering along with thousands of other people -- it's usually too late to make the big money people are raving about.

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Gold Rush Trivia: Go West, Young WomanOne person who beat the odds and got rich during the Klondike Gold Rush wasn’t even a miner. Belinda Mulrooney bought silk underwear, cloth and hot water bottles in bulk and had them shipped to the Klondike, grossing six times her initial investment. With her profits, she built a restaurant and hotel near the gold fields in Dawson City.