The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that he will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price.
It is similar in concept to the Keynesian beauty contest principle of stock investing.
Some consider it a valid method of making money in the stock market, particularly momentum investors; however, fundamental investors believe that market participants eventually realize that the price level is too outrageous (too high or too low) and the speculative bubble pops. The greater fool theory relies on market optimism and market momentum concerning a particular stock, an industry, or the market as a whole.
An alternative to the greater fool theory is value investing, or contrarian investing, which tries to discount, or even go actively against, the prevailing market psychology. Value investors such as Warren Buffett believe that it is corporate profits that are the normal returns from stock investments, and any higher return is possible only due to the greater fool theory.
A stock's price value is determined by judgments made based on earnings, revenue, balance sheets, and a company's future prospects. And many stocks pay dividends as a premium to ownership. Bonds pay interest and their prices fluctuate as a direct reflection of an interest yield on a given bond.
Read more about Greater Fool Theory: In Popular Culture
Famous quotes containing the words greater, fool and/or theory:
“This is the prettiest low-born lass that ever
Ran on the green-sward: nothing she does or seems
But smacks of something greater than herself,
Too noble for this place.”
—William Shakespeare (1564–1616)
“We have the power to do any damn fool thing we want to do, and we seem to do it about every ten minutes.”
—J. William Fulbright (b. 1905)
“There never comes a point where a theory can be said to be true. The most that one can claim for any theory is that it has shared the successes of all its rivals and that it has passed at least one test which they have failed.”
—A.J. (Alfred Jules)