Separating hype from reality
Eveyrone knows that "the hype precedes the reality." Examples are here, here, and here. Of course, there are millons more. The Internet bubble may have been the ultimate case (or perhaps this is). There was so much anticipation of the changes to our business and social worlds that the Internet would cause that valuations hit frothy levels and much money was made and subsequently lost. Now, we are starting to see the real impact of the Internet on politics (check out some candidates Web sites here and here), commerce, and social interactions. If you don't have time for a first life, maybe you have time for a Second one?
As an investor, how do you know when the gap between hype and reality has narrowed enough to make an investment? If you are really ahead of the curve, you may be able to make money by anticipating the next hype wave, but you can get wiped out, too. Remember Pen Computing? If you invested the first time in the 1990s, you definitely didn't make money. Now, it might still be too early for a new investment, but the gap has probably narrowed. Of course, if you wait too long, you risk being one of many who follow the herd and probably achieve substandard returns (unless you come up with a new twist).
That's why it's critical to have a portfolio of investments. As an investor in one or two companies, you should probably focus on things where the gap between hype and reality has narrowed quite a bit. Look for leading customers who are already adopting something new. Wait for integration issues to get worked out. Then, find a team that really knows the space and comes up with a great next gen offering.
If you have the resources to have a portfolio, you can mix in some swings where you try to anticipate the hype. Hopefully, some of these bets on hype, or before the hype, will become reality in your investment time frame. If so, you may have some big winners which cover up all your other sins. If not, the bread and butter investments will give you decent returns overall, and you can swing for the fences again next time.
In any event, leverage the talents of people who are smarter than you in the target market segment. If you can't find these people, then you shouldn't invest. There are always experts who can give you their opinion, and if you get enough of these that support the hype, it's time to take the plunge. If not, you haven't dug deep enough. Keep digging, or keep it real.