Let’s
talk about investment bubbles and the Greater Fool Theory. 
Do
you remember the late 1990s when everybody was taking cash out of their homes
to buy technology stocks? That buying frenzy had no foundation in good research
but continued for a good while simply because the market appeared to go nowhere
but up. Many of us just dove right in and counted on the next guy to take that
investment off our hands at a higher price. Putting hard-earned money into
questionable investments just because they’re going up at a particular moment
in time isn’t always smart, but that hasn’t kept us from doing it.
When an investment performs particularly well, it gets
the attention of investors. This in turn leads to more money being put into the
investment in an upward spiral that takes prices far above levels justifiable
by any rational assessment of the real value of future cash flows the
investment may generate. Everybody jumps into the pool and voila - a bubble of
happiness is born.
Even
those who are aware there is a bubble buy into bubbles. Known as the “Greater Fool
Theory”, the behavior is like a game of musical chairs, and it’s about knowing when
to grab your chair and not get kicked out of the game. Bubbles ultimately lead to price crash. The protracted U. S. housing
bubble, Greater Fool on a large scale, has burst and is claiming its victims,
demonstrating how difficult it is for most of us to know when the music will
stop.
We’ve seen how well
our smartest and highest paid investment bankers have done in predicting the
time to get out of the game. So, ask yourself this when you go to invest your hard-earned money. Are you
making the decision because you think it’s a good investment? Or are you doing
it because you’re hoping for a greater fool to take it off your hands?
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