Is it too early to think about what the next hot idea will be?  In March, the New Yorker published a cartoon with one person at a business meeting telling the others, “I want us to get in on the ground floor of the next bandwagon.”Cartoonbank.com | William Haefeli drew the cartoon, which can be found on this site dedicated to selling the treasure trove of great cartoons that the magazine publishes. To use only one of the metaphors, by that time the financial engineering bandwagon was already being run out of town, while the commodities one had gone from being cheered in the parade to camping out for a command performance in the middle of the intersection of Wall and Main.

There are little ideas and there are big ones, but our investments in them (psychologically and financially) seem to follow a pretty consistent pattern:

I previously dealt with this in May, when I wrote about the factors that appeared to be driving the commodities trade at the time and expressed concern that outsized bets were being taken at a point that might not be optimal.the research puzzle | Entitled “parabolic dreams,” this piece deserves a sequel called “parabolic realities.” We are back to the same theme, as you can tell from the illustrations in each.

The series of questions I posed then was meant to get investors and leaders of organizations to focus on the relationship pictured above.  The chart neatly summarizes much of what drives investor behavior, as illustrated by examples like the persistent underperformance of mutual fund investors versus the results of the funds they invest in (simply because they tend to pile in toward the maturation of a theme).  Yet the really big sins of this type are often committed by “professionals,” as we see all around us today.  A chart of the current mess would need to be amplified greatly to capture the extreme nature of the “real estate doesn’t go down” mantra and the option-adjusted “stuff” that firms put on the books, but it’s the same principle at work.  When the line turns down hard, it’s not a pretty picture.

So, if we are to begin anew, to venture out looking for opportunities by trying to spot that rag-tag minstrel that might lead a band someday, we should think about how best to go about doing so.  Of course, we want to look for talent, for most phenomena have that at the core.  And if we can spot the hook that will generate the appeal, we have an opportunity to get in before a really big move.

That’s not enough, though, as experience has shown.  If the leaders of investment organizations can’t create the reporting and management structures needed to understand how the life cycle of an idea is driving the exposures of their firms — or aren’t willing to crash the party when the time comes — the revelers become too drunk with success to notice the discordant tones emanating from the band.

Getting on the bandwagon early can be very profitable, but knowing when to get off makes all the difference.  For the most part, it means having planned for the inevitable merriment by instituting fairly simple procedures to monitor and manage risk.  Given the chaos of recent days, most firms are probably breaking out the hymns of that old-time religion now.  Don’t forget the tunes the next time a charismatic music man comes to town and you jump on his wagon.