Live Example of a Greater Fool Theory

Dear Investors,

As a small investor myself I take this opportunity to remind all
readers here of the following basic rule that applies to all class of
investors in the Stock Market. More so when the market is peaking,
there seems to be no end of the SENSEX rising, and there is a lot of
charm in entering the market,the lure of the IPO's, no matter what the
cost is.

Let me explain this interesting concept - The Greater Fools Theory.

During the Great Depression (1929 to 1941), Franklin Roosevelt (then
US President), could avoid huge losses on his portfolio when one day
while he was on his way to office, he heard his liftman recommending
on the best of the stocks to buy. Immediately as he reached office, he
called up his broker and instructed him sell all his stocks. It was
Wednesday. The next day was 29th October 1929, and is marked in
history as Black Thursday till date. This was the day when the US
Stock Market crashed like never before and what triggered the Great
Depression in the world economy that lasted for more than 10 years.
People lost huge amount of Money going bankrupt in most cases (Losses
for the month did total $16 billion, an astronomical sum in those
days.).

President Roosevelts decision to sell stocks one day before the crash,
laid foundations of this theory, which we now see in text books as The
Greater Fools Theory.

The Theory goes like this :

ALL PEOPLE INVESTING IN THE STOCK MARKETS ARE FOOLS. And every fool
when he is purchasing shares at higher costs, is expecting, that a
still bigger fool than him is going to repurchase this stock from him
at a still higher cost to him. And this drives the market so that the
cycle continues and the market attains new peaks. The Greater Fools
keep entering the market at higher and higher costs and the Market
Booms. With the entry of more and more fools, who are expecting still
bigger fools to enter the market following them at still higher costs,
the market gradually reaches a point of saturation. A point beyond
which there are no more greater fools willing to enter the market,
Meaning to say that there are no investors left who are willing to
purchase at that level. This is the point where the market goes bust,
crashes and the last of the fools who had entered the market at the
highest costs, expecting that there would be still greater fools
willing to purchase at higher costs lose the most.

Now the difficult question is, how to identify the time when the
market is just reaching the point of saturation? That is, the point
after which there will be no more fools available in the market, and
therefore it is important to void being amongst the last of the fools.
Because when the market peaks and then crashes, it is with a lot of
vengeance. Not giving time to the retail investors like you and me to
take exit. The virtual gain is all lost in a day or two. And it is too
late to realize : Oh God, what a fool I was, not to have sold my
shares yesterday.

The theory says that one doesn not have to be a Technical Analyst or a
Fundamental Pundit to find out as to when the market is reaching the
point of saturation. You can identify, just by keeping eyes and ears
open. That is when you see and when you hear, people who are least
expected to talk of shares, suggesting their motive to enter the
market in what they think are the best of the stocks, you can rest be
assured that the market is reaching the point of saturation and
therefore this would be the right time to exit and book profits.

The theory is not wrong, not at-all wrong when you try to correlate it
with what happened in the Indian Stock Markets during the last one
decade.

1991-92 Stock Market Scam triggered by Harshad Mehta: I was doing my
studies then, and many like me who were just as ignorant as I was,
were talking of the stock markets. Not because we knew what was
happening in Dalal Street. But because of the hype that the media had
created. Harshad Mehta was in the Quiz Books as one of the known
market analyst who could move the index. Not really knowing what an
index was. Leo Toys came out with bedroom games on Stock Markets and
soon we were trying our hands in these virtual games and also at
times, reading ET, suggesting to each other on the best performing
stocks. I am sure there were many fools like us (unfortunately more
recourse-full unlike us), who had never before known of the
intricacies of the stock markets, but had invested during the last
phase of the Boom just to lose heavily when the Scam ultimately broke.

1993-94: The Initial Public Offer Scam (IPO Scam): This was the
vanishing companies scam. Companies with no real existence came out
with public issues. But only to disappear into oblivion once the money
had been collected from the ignorant investors, who were at that time
in a shopping spree of IPOs.

2000-2001 : Ketan Parekh triggered Scam: We all know as to how the
market was frenzy about the tech companies just before this Scam broke
loose. Everyone at this time was talking about entering the stock
market through the dot com companies. Even our driver one day told me
about the possibility of making good money by investing in SILVERLINE
during this time. What better example can be given to support THE
GREATER FOOLS THEORY.

At last, coming back to the point from where we started. If Franklin
Roosevelt could identify the peak, by hearing his liftman talk of
investing in shares (who was the least probable person according to
the president, who could know of the Markets). And if before every
peak, there are people like my driver (with all respect to him)
willing to enter the market at the highest cost. It should note be
very difficult to identify the point, beyond which there will be no
more greater fools willing to enter the market, and therefore a crash
is imminent.

Now every person in the street have opened demat accounts and applied
for a mega IPO.I wonder who the Greater Fool is ? Certainly not its
Promoters.

Happy Investing

wonderful! three cheers to fool's paradise.

Everything is easier said than done.

If I can find a buyer more foolish than I am , I am relatively wiser than the foolish person I sold my shares to ! Is that right?

And what if he sells it for a higher price? Who is the fool then? The one who sold it lower (you) or who bought it higher(who can still sell it higher, making you look more ridiculous)?

Nice and interesting article Mr Sunilm02

ofcourse the markets leave a lot of foolish trailblazers, yet they get to make a lot of money though. And that is exactly my point, the buyer need not necessarily be a fool.

you should try to get your facts straight: fdr didn't become president until 1932 and it was joe kennedy who sold all of his stocks after his shoe shine boy started recommending them.

India is second most populous country in the world and when FIIs are investing more than 17 billions in our stock market in last year, I won't see any difficulty in finding a greater fool than me after entering at this peak level.

Nice article to read once again,in the backdrop of present scenario.

There are 2 concept one is Buy Low & Sell High ,

(here how do we know this is the lowest,say in case of Infosys ,can we say this is relatively lowest)

Second one is Buy High & Sell still Higher(say in case of Grasim,about to breach Resistance)

Here which one is Safer depends on individuals perception of Risk.