What is the Greater Fool Theory in the Context of Investing?
Posted on 05/18/2021
In the context of investing, the greater fool theory is the concept that the price of an asset is determined by whether you can sell it for a higher price at a later point in time, and that the asset’s intrinsic value is less important than the increase in demand. The party buying the “overpriced” asset later on, for a higher price, would be the greater fool.
The “fool” or “bagholder”, would be stuck with the asset at the high price, thus the price of the asset would likely fall.
Some investors, understanding the concept of the greater fool theory, will buy questionably priced securities without any regard to their quality. If the theory holds, the investor will still be able to quickly sell them off to another “greater fool,” who could also be hoping to flip them quickly.
Easy Examples
Tulip mania
2008 U.S. mortgage-backed securities
Speculative alt coins
NFTs
Junk bonds