The difference between a trend and a fad may be subtle, but if you’re an investor who’s considering putting money into a business that’s part of either, it’s important to know the difference.
Fad defined
A fad is defined as ‘a desirable trend characterised with lots of enthusiasm and energy over a short period of time. Fads are often seen with common consumer items, especially around a holiday season. They can also be seen in other areas, such as investing.’
A product that’s mainly popular due to styling rather than the function it performs is likely to be a fad – but it is extremely hard to be sure. For example, Fitbit and Apple watches could be considered cool and stylish but they are very functional. Google Glass just couldn’t be thought of as stylish, but they are functional… and now seem to have been just a flash-in-the-pan trend that didn’t last.
Definition of a trend
A trend is defined as: ‘A pattern of gradual change in a condition, output, or process, or an average or general tendency of a series of data points to move in a certain direction over time, represented by a line or curve on a graph.’
How do you spot the difference?
Sometimes it can be difficult to know whether you would be investing in a company that’s following a fad or is part of a trend. Especially at the very moment that you need to decide on whether or not to commit your money. Sometimes only time can provide the perspective that you need to be able to tell one from the other.
Trends typically achieve at least a few of the following:
- Solves a real problem – for example, opening a previously complex market
- Saves people time or money or both – just as Uber saved people time in finding a cab and could (depending on demand) save money on fares
- Addresses a huge need – such as Tesla cars cutting out pollution
- Performs a function much better than anything could before – such as smartphones compared to analogue. Look out for plenty of knowledgeable people saying the business has created something that’s a game-changer
- Appeals to a wide audience – not just a relatively small band of early adopters
Why spotting the difference between the two matters
A fad tends to be short-lived, which means that a business may only have a little time to profit from its success, making it less likely to trickle profits back to you.
On the other hand, a trend can last for an extended period of a few years. And that means the business could have plenty of time to exploit its position, which could point to a good chance of becoming highly profitable. So, you’d have more chance of sharing in the success.
But please note, spotting and investing in a company that’s part of a trend can’t guarantee you’ll profit. Even if you invest early-on when the trend is only just in its infancy. But it could offer you a greater chance of successful investing.
