The Greater Fool Theory
The Greater Fool Theory is the belief that we can always buy investments at any given price, setting aside valuations, and eventually turning them into a profit because there will always be a “Grater Fool” willing to pay the higher price.
The Greater Fool Theory proves itself best at continuous bull markets, where everybody seems to rush in investments because of the high momentum of equities. Unfortunately as Sir Isaac Newton noted “Every thing that goes up must come down” readjusting the investment to its true value.
Manias or Bubbles are a true example of “The Greater Fool Theory”. Remember 2007? Everybody seemed to be rushing into the house market, flipping houses and expecting to attain a bigger return on their investment even though the house had already doubled in price. Sadly as “foolish” as this theory sounds we keep making the same mistakes over and over again as history has shown us. Bubbles had not been a one time deal in the stock market’s history, but we seem to “rush in” the hype every time we see the opportunity to make a quick buck.
The Risk involved by buying any sort of investment for the sole reason that it increased drastically in momentum is nothing but absurd. Only few “lucky” investors get out of the rush profitable, leaving the majority of investors holding investments too highly overvalued it becomes hard to turn them into a profit and sometimes they are even forced to default of the investment.
The housing bubble in 2008 is the latest example of “The Greater Fool Theory” at it’s best, therefore we need to learn and evaluate our past mistakes. Remember to ALWAYS take a deep breath and set aside emotions from investing.
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