Picture this - the coolest music festival ever is around the corner and you haven't bought tickets yet as you missed out on the "early bird" ones, which cost Rs. 2,000. A person you were briefly acquainted with tells you that you can buy his ticket for Rs. 3,000.
Since you're desperate to enter the gates of heaven, you pay the inflated price, only to realise that the music festival was in the middle of an abandoned lot, and you've never heard of the bands playing. You, my friend, are what people in the investment world call "The Greater Fool"
What Is It?
Usually seen in times of market "bubbles", where new investors come in and repeatedly pump a new, cool asset class, whether it is a Mortgage Backed Security or a Shitcoin (oops), riding on the hope that a not-so-learned investor will buy it at the inflated, overvalued price that is available. The fool is the one who pumps, and the greater fool is the one who falls for it.
This Time It's Different
Just like that toxic ex who says they will change and this time they won't cheat, this particular trick never fails to ruin investors. According to Sir John Templeton, the "This time it's different" justification is the oldest one in the book.
The Greater Fool theory is founded exactly on that line of reasoning. Whether it was the technology bubble in 1999 or the real estate bubble in 2007, the narrative in both cases was that a new asset class with a new set of characteristics had emerged, making this time truly different.
At the peak of either of those bubbles, the average investor said the same mantra - this one can only go up. Clearly, that wasn't the case.
Go With The Flow!
If there isn't a constant supply of money, the Greater Fool theory has a hard time coming to fruition. Whether or not the liquidity is justified is a very separate debate. The Greater Fool theory propelled Indian stock prices in 1992 as valuations reached astronomical heights.
However, hidden behind all of this fanfare and uproar were the endless sums of money that were being transferred from the banks into the pockets of brokers. The Greater Fool idea collapsed on its own the day the tap was switched off by the RBI.
Don't Be The Greater Fool
Keep in mind that rational growth and sustained profitability continue to drive asset values. As an equity investor, you should concentrate on high-quality stocks where you may expect to see long-term returns above average.
The Greater Fool argument has always collapsed in the past with extremely detrimental results. It has nothing to do with fundamentals and valuations. The best you can hope for is to not become the greater fool yourself!
A few tips:
Always do your own research (or get a good advisor like Rupeeting!)
Don't take the word of a finance guru (or influencers) as a commandment
Look for the intrinsic or inherent value in the asset before making the investment
Perform due diligence