The Greater Fool theory simply states the people who buy any securities without considering the valuation of a company. Their mindset will be that they can sell when the price moves high or buy a stock blindly while the stock crashes.
The heroes of this theory are called the Greater Fools, or speculators.
Investors earn and become rich only because of these speculators, so we have to praise them. Even professional traders do both fundamental and technical analysis of a company.
They know when to go in, book profit, and get out and they will be happy with their trade value
Greater Fools Behavior:
The greater fools are investors who invest in any investment components without understanding the underlying value of the securities. They don’t care about the intrinsic value and most often these fools are found to invest during market bubble.
· These fools invest in any components or company with the advice of some other fools.
· The greater ideology behind the buy is to sell to another level of the greatest fool.
· There are few guides for these types of investors having their own YouTube channel. They used to teach them on the performed stock over the last 10 years or 20 years and it would be in a bubble currently.
· Those fool advisors can’t analyze a stock that will become a multi-bagger a few years later.
· For Example, the Gold price per gram was around Rs. 3200 in 2019 and is currently at Rs. 5600. Those advisors kept quiet, while the gold market did a rally, and currently, everyone speaks about the gold move to Rs. 8000 so purchase Sovereign Gold bond.
· Investments are always done based on price growth and not on value.
· These investors have great greed for capital multiplication. So, any amount of profit will never satisfy them.
Entry and Exit Strategy by Greater Fool Theory:
· These investors enter into the stock when it is bullish and exit while the market falls. This is one type of greater fool.
· The next category is buying the stocks of the company which had high value in the past and is currently bearish.
· The final category, investing in sectoral stocks like pharma stocks and having them for the long term.
· In terms of sectoral stocks, except a few others behave uptrend only in some seasons, then fall continuously till a period. Again it moves up. Totally if you hold these kinds of stocks for a longer time, there will be zero gain.
For example, Glenmark Pharma which was at Rs. 1250 per share in 2015, currently traded at 478. There were many uptrends in the stock in the past 5 years. These stocks are not investment stocks, use them for a particular season and make income out of it.
· There are many stocks like Infosys, when the stocks perform, these investors exit and book profit, but these are the stocks to be held for the long term. Infosys provides a huge dividend, bonus, and other benefits.
· Using a proper entry and exit is not seen in these kinds of investors. Their aim on investment is to book profit, not on the value of the company.
Have a look at our article on Indicators of the stock market crash
Greater Fools and Intrinsic Value:
· The greater fool theory is completely in the opposite direction to intrinsic value.
· They watch and trade based on the news available in the market.
· They won’t take time to calculate the value of the company they are looking to invest in.
· The intrinsic value is a far theory for these kinds of players in the market.
Till 2018, YES bank was traded at 450 rupees per share and the share fall down in 2019 due to some management issues. Many intelligent investors quit the shares initially, some hold the stock. Many great fools invested in the falling market thing, “they are investing in lower investment without knowing the business model and the earnings of the company”. The share price still falls further another set of investors came buying more shares at Rs. 100 and currently, it is traded around 10-20.
· This is the real-time example that happened last year in the Indian stock market.
· There may be many rumors in the market mainly by media members and Youtubers. You should understand, that the person who works in the news channel should not trade.
Conclusion:
· The greater foolish theory has continued for centuries in the share market around the world.
· The people who trade a stock without knowing the value and earnings of the company are known as Great fools.
· They are known as speculators and they become the main source for the investor’s success.
· These great fools don’t know about intrinsic value, P/E ratio, and fundamental tools to analyze.
· They are news-based and the market crash made them bankrupt.