Speculative Bubble

We all have read about stock market trading on fundamental and technical analysis. Looking at the stock market trends, statistics, and intrinsic value, "The Great Fool Theory" was explained by Prof. Burton Malkiel.

Imagine there's a hot trend where everyone is buying something, like a toy or a game, and its price keeps going up. The Greater Fool Theory says that even if you know it's getting too expensive, you can still buy it, hoping to sell it later to someone else for an even higher price. This is because you believe there will always be someone willing to pay more, even if it doesn't make sense.

So, you're not thinking about whether the thing is actually worth its price; you're just betting that you can sell it to someone else, who you hope will be a "greater fool" willing to pay even more. But when everyone starts realizing it's too expensive and stops buying, the prices crash down fast. If you're stuck with that thing at that time, you could lose a lot of money because no one wants to buy it anymore.

When I read about it, I found it controversial because they talked about finding a 'fool' who would buy stocks during a market bubble. A bubble occurs when stock prices become overvalued compared to their actual worth. The theory encourages investors to search for buyers who they can persuade to purchase their stocks at inflated prices during a bubble.

Why is the theory famous?

This theory became famous because it suggests that sometimes, taking big risks or doing things that seem silly can lead to big successes, especially in investing.

People like Warren Buffett and Benjamin Graham, who are known for making a lot of money in the stock market, have talked about this idea.

It's like saying that being a bit of a "fool" in the right way can sometimes be smart and profitable.

Because of these famous investors and their success stories, a lot of people became interested in this theory.