value
The greater-fool game
The rule
Buying at a silly price only because you expect a sillier buyer later is like a chair in musical chairs.
Where it flips
Once in a while a 'crazy' price is later justified by amazing growth. But that is a bet on the business, not on the next fool. The fix is to ask whether the price is justified by real worth or only by the hope of selling higher. If it is the latter, you are playing musical chairs.
In a mania, people knowingly pay more than something is worth, betting a 'greater fool' will pay even more before the music stops. It can work for a while, which is what makes it so tempting. Everyone is getting rich on paper. But the game needs an endless supply of new buyers. When they run out, the price does not slowly drift down; it collapses, and the last buyers hold the loss.
A worked example
A stock with almost no profit runs from ₹40 to ₹950 purely because each buyer expects to sell it higher. When new buyers dry up it falls back toward ₹90, and the paper fortune was never real. [illustrative]
How to spot it
- ·a price justified only by "someone will pay more"
- ·no profit or real worth under the price
- ·everyone rich on paper, no one selling
Burton Malkiel · A Random Walk Down Wall Street