Greater Fool's Theory
Prevent yourself from falling into the pit of being a greater fool!
You must have heard the term 'market bubble' quite often in the finance sector. A market bubble is an economic event in which the prices of speciﬁc stocks rise drastically and increase far more beyond their fundamental value.
One commonly discussed theory related to the formation & continuation of a bubble is
"The Greater Fool Theory".
The Greater Fool Theory is the idea that, during a market bubble, one can make money by buying overvalued assets and selling them for a proﬁt later.
This is because it will always be possible to ﬁnd someone who is willing to pay a higher price for that asset. (P.S. referred to as the greater fool)
An investor who subscribes to the Greater Fool Theory will buy potentially overvalued assets without any regard for their fundamental value.
Unfortunately, when the bubble bursts (which it always does), there is a large sell-oﬀ that causes a rapid decline in the asset values.
During the sell-oﬀ, you can lose a great deal of money if you are the one left holding the asset and cannot ﬁnd a buyer.
The greater fool strategy usually is not a feasible or sustainable one for investors who do not have the speculation and market trend expertise of full-time day traders.
How to prevent yourself from falling prey to greater fools theory in your general life?
Half knowledge is the deadliest thing in the world!
So before getting into anything, you must know all the in-&-outs as well as all the pros & cons involved to avoid falling into the pit of being a greater fool.
Due diligence is recommended as a strategy to avoid becoming a greater fool yourself.