New Paradigm

Asset Financing

What is a new paradigm?

In the world of investors, a new paradigm is a new concept, an idea or a revolutionary way of doing things that replaces old beliefs or ways of doing things. It could be a political or economic event, a new discovery in academia, a new technology or innovation, a new business or an entrepreneur, or some other important event . New paradigm ideas or concepts are so revolutionary that many people think it will change the way we think and act in the future.

The new paradigm has its roots in the idea of ​​a paradigm shift in science, in which technology or new discoveries completely change the way people think or interact with a subject.

Key points to remember

  • A new paradigm is a new way of thinking or doing things that replaces the old one.
  • New paradigms in the stock market can mean great profit potential as investors crowd in on revolutionary new ideas.
  • Investors in new paradigm ideas should be cautious, as prices may become too inflated due to the hype. When reality sets in, the actual value of the company or companies can be considerably lower than its peak stock price.

Understanding a new paradigm

Investors can watch new paradigms unfold before their eyes as they watch the actions of companies that are on the border of innovation. A stock can soar depending on its revolutionary way of doing things.

Investors should be aware, however, that not all new paradigms work or end well. While companies like Amazon Inc. (AMZN) – who have seen and benefited from the demand for Internet shopping – have been very successful, not all companies are. The pharmaceutical industry is full of companies “on the verge” of making big discoveries that could change the world or the health system, but many of the drugs or treatments they make never get out of development. Their stocks may (or may not) rise on speculative demand, fall back to where they started, or fall.

Investors who bet on companies that are really starting a new paradigm or capitalizing on a new paradigm can make a lot of money in the long run, but finding these companies is not always easy. These companies are often highly speculative, have negative profits and are misunderstood in their early days. It is only in their final stages, once the stock price has risen considerably, that most investors realize this and start to leap. This can create a lot of volatility, making it difficult for investors to stay with stocks for the long term.

Between 1997 and 2009, the Amazon stock recorded seven drops of 60% or more, and the stock fell 95% between 2000 and 2001. Initially, the stock dropped 46% after the IPO, then recovered from a low of $ 1.31 and never saw this price again. Some of the early investors may have benefited greatly, but would likely have been shaken by the many severe declines long before the stock price overshadowed by $ 2,000 in 2020.

While Amazon has flourished following the dotcom crash (2000-2002) – which was based on the new Internet paradigm – many other “Internet” titles have not. Over 50% of the dotcom companies went bankrupt, and the 48% who survived until 2004 did so at much lower stock prices. It took many companies many years to recover their 2000 stock prices, and many are still trading well below these levels. 2000 high until 2020.

New paradigms are often followed by a calculation, as investors overestimate the magnitude of the changes. They lead to excessively high valuations and prices drop significantly once reality is installed. Ultimately, companies must generate profits to justify high stock prices. If companies cannot generate profits, no matter how new their idea or product is, investors will eventually be wary and abandon the stock.

the Harvard business review Often publishes pieces that dig into paradigm shifts or new paradigms in the business and investment world. For example, “You don’t have to choose between fast, cheap or good. Instead, Change the Paradigm ”(April 2020) postulates that instead of compromising between two of the above three values, leaders should instead focus on optimizing all of them. By being creative, using data, and modeling the behavior of start-ups, the authors of the article argue that leaders should be able to rethink how they compromise. New ways of thinking, like this one, can help investors define various challenges such as which assets or which asset classes to select for a portfolio.

Concrete examples of new paradigms

The term “new paradigm” became a term widely used in the 1990s, as marketing companies and firms began to use the term for almost any new product or campaign. It was used in particular during the dotcom boom years. At times it seemed that everything related to the Internet was described as a “new paradigm” or a “paradigm shift”.

The years of the late 1990s were characterized by high-tech stocks that eventually collapsed. From 1995 to 2000, the technology-dominated NASDAQ index rose from less than 1,000 points to more than 5,000 points. Tech companies have become a new paradigm for investors and analysts, as their products and ways of thinking have the ability to fundamentally change the way companies operate and grow. The Internet has made a difference, but investors initially thought companies were too high. Their real value, at the time, was considerably lower than the peak prices that investors pushed up to these companies.

The Great Recession also provided a new paradigm for many investors as the notion of uprooting and supporting more sustainable investments came into play. It has become important for some investors and asset managers to take environmental, social and governance (ESG) factors into account when investing. As the housing bubble and the crisis show, complex financial instruments like mortgage-backed securities with no solid underlying assets have proven to be disastrous.

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