Following the newest fad usually leads to destruction of value

It is widely known that fad investing usually leads to lost money and time.

It is also known (perhaps not so widely) that when companies try to follow the newest fad they also end up wasting shareholder's money.

One such situation I read a long while ago was at the height of the dot-com era. It was then considered a sign of financial stability for tech companies to buy or sponsor stadiums, baseball teams and other sports-related endeavor. This typically led to companies wasting money and making malinvestments outside of their core expertise. These malinvestments may not have caused huge concerns for companies like Oracle, HP and AT&T (major sponsors of places such Oracle Arena, HP Pavilion and AT&T Park), but nonetheless were wasteful.

Another typical sign of fads are when companies start renaming themselves to be associated with the current "newest thing" or "hottest industry". In The Intelligent Investor, Ben Graham mentions companies that switched names to include prefixes such as "electronic", "computers", and "franchise", just to lose a lot of money afterwards. During the dot-com era, companies changed stock symbols (Sun adopted the ticker JAVA), mottos (again, Sun adopted "We're the dot in dot-com") and others even adopted prefixes such as "e-", "i-", "wireless" and "optical". All were destined to overvaluation and then doom.

So, when I hear that everyone and their moms is starting up a "social networking" site, I get really skeptical. The latest one was WD-40, the company that makes the popular lubricant by the same name. While I think WD-40 has strong pricing power on their main products and at some price would be a great investment with a moat, I grow suspicious when such brick-and-mortar companies try to venture into things like social networks.

My opinion of social networks (the legitimate ones such as Facebook) is pretty low already. When one comes from an old lubricant company, I know something must be fundamentally wrong with management. At the very least, I would require an extra margin of safety on top of my current one to invest in a company that wastes time, money and effort with such fads. At 20x earnings, I'm passing on WD-40 for now, despite its somewhat attractive dividend yield and pricing power.

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