This article, by Justin Baiocchi, was originally published in The Northern Daily Leader on 25 October 2014.

Earlier this week I was doing some work at the dining room table, deep in thought as I pondered the theoretical advantages of the Capital Asset Pricing Model over the Arbitrage Pricing Theory. Into this comfortable, cosy world, intruded an almighty racket of cheering and whistling, coming from the TV in the lounge. It turned out to be the grand finale of yet another reality TV show, The X Factor. As I watched the confetti and adulation rain down on the winner, I wondered whether or not we would remember her name in a year’s time. For it seems that every subsequent winner of these types of television shows seems to last for a shorter period of time in our consciousness. It’s as though the law of diminishing returns has taken hold of reality TV – if the first winner of X Factor enjoyed a fame factor of 10, this week’s winner can probably expect a 2 at best.

In many ways the life of the winner of X Factor (or Idol, or Big Brother…take your pick) resembles some of the investment fads which burst onto the investing scene – one day it’s the main topic around the BBQ; the next day it’s all over and anybody foolish enough to have been taken in is left ruing the cost of an expensive lesson. An example of this was the recent craze in rare earth metals. The story sounded plausible enough: rare earth metals are a mix of very rare and very expensive metals, with obscure names like Scandium, Promethium and Cerium. Their uses are varied and they play a role in the manufacture of everyday devices such as television screens, cameras, ipods and also a range of medical uses. As their name suggests, they are rare indeed, with major deposits located in China and the US and Australia to a lesser extent. China produces around 95% of rare earths and uses quotas and production restrictions to limit supply. In the height of the mining boom, a small Australian company, Lynas Corporation, began development of a rare earths deposit at Mt Weld, in Western Australia. The plan also included a processing plant in Malaysia. As prices for rare earth metals rose, so did investor interest. At one point in 2011, Lynas Corporation was valued at over $4 billion – an amazing valuation considering the company had yet to make a profit and had accumulated losses of $200 million.

These mundane facts did not stop investors from piling into Lynas’ shares, with disastrous but predictable results. Problems with the processing plant and a collapse in the price of rare earths brought the company to the brink. Anyone who bought shares at the peak would have lost 96.67% of their investment. The moral of the story – think of a fad stock as an X Factor winner, and think where they might be in a few years’ time.