PCTL Speaking of Investment Theories!! What Is the Greater Fool Theory? The greater fool theory argues that prices go up because people are able to sell overpriced securities to a "greater fool," whether or not they are overvalued. That is, of course, until there are no greater fools left.
Investing, according to the greater fool theory, means ignoring valuations, earnings reports, and all the other data. Ignoring the fundamentals is, of course, risky; and so people subscribing to the greater fool theory could be left holding the bag after a correction. KEY TAKEAWAYS The greater fool theory states that you can make money from buying overvalued securities because there will usually be someone (i.e. a greater fool) who is willing to pay an even higher price. Eventually, as the market runs out of fools left, prices will sell-off. Due diligence is recommended as a strategy to avoid becoming a greater fool yourself.
Understanding the Greater Fool Theory If acting in accordance with the greater fool theory, an investor will purchase 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.
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