Greater Fool Theory

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.