Greater Fool Theory

The theory means that there will always be a “greater fool” in the market, who is willing to pay higher prices for an already overvalued share. In it people will purchase questionable securities at overvalued price just with the intent to sell them at higher prices little later, assuming there will be another fool, who will be willing to buy at higher prices to do the same thing and the spiral continue until it reaches the tipping point. That’s how a bubble is created.

Unfortunately when the bubble burst, the prices decline at the speed of light and people turn up losing a huge amount of hard earned savings.

What makes people want to apply this strategy?

We are speculative in nature and impatient living beings. We love to make quick money and see it as a great opportunity to turn millionaire over night. As human nature, we like to follow the herd, though it may be leading us to the wrong side. We lack the courage to walk alone on the right path. It becomes difficult when you see everyone around you is making quick money and you are doing nothing. You feel like missing out the race.

In the race of making someone else a fool, don’t forget you are too one of them.

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How to avoid being a fool?

Whenever you purchase next time just because there is flat 50% off, just ask yourself do you really need the product? We just end up buying the products just because there is 50% off, diluting the cash in unimportant things. Same scenarios happens in the field of investing, when you see the price of a hot stock is sky flying, you too want to take a pie of it and don’t want to be miss out the opportunity to be a millionaire next day. There is nothing wrong in gaining through it. I may not against it. However, the chances of losing are way higher than winning.

After all winning is a combination of hard work and patience with consistency.