Who Will Be The Greater Fool?

I subscribe to many newsletters and have attended numerous teleconferences over the years relating to financial matters. The majority of information concerns personal wealth; how to create it, and more importantly, how to keep it. One theory made me smile, but then made me think.

Everyone has at some point bought items they use and never expects to get a return on the purchase price. A bed or a microwave oven are two examples. Motor vehicles always lose their value, unless it happens to be rare and collectible. Some items such as basketball cards or vintage bottles of wine can expect a higher price if the right buyer is found.

Buying shares or securities is exclusively done in the hope that the initial price per share will rise and therefore see a capital gain. There are a host of reasons why people sell, but only one when buying–they want to see a profit.

For most of us, the biggest purchase over our lifetime is the family home. History shows that most real estate increases in value, which means after living in the house, it will be sold for more than it was bought for.

But what if it doesn’t? What if, instead of a tidy little profit, your home sells for a big fat loss?

Much the same as owning shares in the stock market, property increases over time. And although house prices may fall in the immediate future, given enough time they will recover.

Being a greater fool is nothing to laugh about

In finance and economics, the greater fool theory states that the price of an asset is determined by whether you can sell it for a higher price, at a later point in time. On assets where the theory applies, it is implied that the asset’s intrinsic value is less important than the increase in demand, however irrational it might be. The person buying the overpriced asset later on, for a higher price, is deemed the greater fool.^[

                                                                                                                              From Wikipedia