I spent part of last night watching a PBS documentary called The Merchants of Cool. (Clicking the link takes you to the fantastic TopDocumentaryFilms.com site, home of all sorts of great doc films) The premise behind the film was the lengths that corporate America will go to find out what’s cool. There’s a constant race to get in on the bottom floor, to identify trends before they hit the mainstream. If the company can get in ahead of the curve, they can be in a nice position to sell whatever becomes cool to the masses.

The film does a great job of explaining how identifying cool has become a big business mostly because it isn’t easy. Sure, anyone with an ear to youth culture can tell you what’s cool now, but 6 months or a year from now they likely have no idea.

That’s the crux of cool. Youth culture is so fickle that something that just a few months ago was all the rage is nothing but a memory. In today’s world, fads rise and fall with a greater speed than ever before. Essentially, cool is a tough business. It’s tough to get right and it’s even tougher to replicate.

How do some companies keep churning out cool products? Apple has owned cool ever since the first generation Ipods. Does Apple make a conscious effort to be cool? Or is cool just a byproduct of making a well designed product? Compare that to Dell. Dell used to be cool. (remember this guy?) Now they’re about as cool as Limp Bizkit.

Should you invest in cool companies? Going back to the Apple example, they are absolutely nailing cool right now. Yet before that, the company had an extended dry spell in which they could barely sell Macs. There are tons of examples of companies who burst on the scene with a can’t miss product, watched the stock price soar, only to have the inevitable fall once the fad ran it’s course. How do you separate Apple or Google from Crocs or the Atkins Diet?

I’d almost propose that you don’t even try. Rather than looking at fads, look at a company’s balance sheet. Look for companies that have some sort of competitive advantage over their adversaries. Look for companies that don’t have much debt, so they can always lever up the balance sheet during lean times. Don’t avoid cool all together when investing, just don’t pay a premium for it. And remember, like fashion, cool is cyclical. The company that sells for a discount now might be tomorrow’s cool company.

I’m not just talking about companies that make excellent products. I’m also talking about those companies that, for whatever reason, the market has decided they are worth a substantial premium over their peers. The herd mentality of piling into those stocks takes us back to our high school days of smoking just to fit in. It was stupid then and it’s stupid now.

When it comes to investing, most of the time cool isn’t worth the premium the market puts on it. Perhaps that’s the case in real life as well.

Tell everyone, yo!