One phrase has wiped billions of dollars off the balance sheets of individuals and companies: “This time is going to be different because….” It is how people often rationalize jumping on a trend or bubble, even when past experience shows it will not last. The rise of Trivia Crack (which I play frequently), and the commentary accompanying it, is the latest example of this phenomenon.
The housing crisis
During the height of the US housing market bubble, I remember seeing multiple experts explain why the steep run-up in prices was not the same as past bubbles. They explained that it was due to changing demographics, realignment of wealth, new consumer behavior that favored home ownership over other asset classes, and other arguments that made them sound very smart on CNBC. Years earlier during the dot.com boom, experts (many of them the same) explained how that was not a bubble and companies would no longer be valued on profitability (but on market share) and how the economics have changed.
In each of these boom times, experts and laymen alike refused to look at past history, such as Tulip Mania, and picked facts to justify a difference where none existed. Turns out these arguments, while factually correct in some cases (i.e. demographics have changed in the US) were simply noise and did not truly impact the underlying asset value.
This same phenomenon is evident in the technology and digital game space. A game becomes very popular and immediately the entire industry thinks there is a new formula for success. The company behind the game may sell for millions and literally hundreds of companies try to “fast-follow” or add the mechanic to existing products.
The current tulip mania around Trivia Crack echoes how strong this phenomenon is. For those not familiar with Trivia Crack, it is a peer-versus-peer trivia game that has skyrocketed in the mobile game charts. What is interesting is how industry experts explain howTrivia Crack is not like past viral products that have skyrocketed and then plummeted. This time, they say, things will be different because of a, b and c.
Unfortunately for these experts, and those who listen to them, the same arguments were made when QuizUp shot to number one, when SongPop was the most popular app, when everybody was playing Draw Something, etc., etc. I may be wrong and Trivia Crack may turn into the next World of Warcraft, a billion dollar franchise, but the similarities to past one-hit wonders is difficult to ignore. I would be more than willing to bet that Trivia Crack turns into the next “My Sharona.”
What it means for you
Rather than looking at this phenomenon intellectually, this post is meant to alert you to several potential problems. First, I have seen many people identify a bubble but still jump in believing they will exit before it is too late and enjoy a good profit. The problem is many, many others are pursuing the same strategy. Given that you do not have any inside information on when the bubble will pop, and it often pops very dramatically, you are likely to get caught in the fall rather than profiting from it. You have to decide if you want to end up with a lot of tulips.
Second, for companies, you need to identify when a product’s success will not sustain. I have seen many companies rationalize why a game is different, then spend a huge sum on acquiring the IP (either by licensing it or buying the company), only to find that the game fits the same pattern as previous games and is virtually worthless in a year or so. This mistake can cost you millions, or even hundreds of millions, of dollars.
Finally, and a corollary to the previous point, rushing to create a similar product or add key features of a potential one-hit wonder is usually a waste of effort. By the time you launch your product, the infatuation with the mechanic has likely passed.
- Whenever there is a huge spike in asset price or popularity, discount the analysis of how it is different than past spikes.
- Most of the analysis will be noise to rationalize the increase and at the end of the day the product or asset class will perform comparably to previous incidents.
- Do not try to capitalize by holding on with the plan to get out just before everyone else or discount the historical data; both are likely to result in a significant loss.