Once upon a time, in a village, a man appeared and announced to the villagers that he would buy monkeys for Rs. 10 each.
The villagers seeing that there were many monkeys around, went out to the forest, and started catching them.
The man bought thousands at Rs. 10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs. 20. This renewed the efforts of the villagers and they started catching monkeys again.
Soon the supply diminished even further and people started going back to their farms. The offer increased to Rs. 25 each and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it
The man now announced that he would buy monkeys at Rs. 50 However, since he had to go to the city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs. 35 and when the man returns from the city, you can sell them to him for Rs. 50 each."
The villagers rounded up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only monkeys everywhere...
From Wikipedia:
The greater fool theory (sometimes the bigger fool theory, also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else for an even better price.
Some consider it a valid method of making money in the stock market, particularly momentum investors; however, fundamental investors believe that market participants eventually realize that the price level is too outrageous (too high or too low) and the speculative bubble pops. The greater fool theory relies on market optimism and market momentum concerning a particular stock, an industry, or the market as a whole.
"Sounds like playing 'passing the parcel' ... but with a
Time Bomb"
It is similar in concept to the "Keynesian beauty contest" principle of stock investing.
http://en.wikipedia.org/wiki/Keynesian_beauty_contest
The question is whether you buy stocks that you find most attractive
or
You buy stocks that others would find most attractive (regardless of what you think about those)
However, in a world of too many fools, this does not end here, this can be carried one step further to take into account the fact that other investors would each have their own opinion of what other investors think. Thus the strategy can be extended to the next order, and the next, and so on, at each level attempting to predict the eventual outcome of the process based on the reasoning of other rational investors :)
It is true that "Markets are like Voting machines… "
However, your Investment decisions or opinion need not be the "Average" opinion on the street (that too , of a street that itself looks at others opinion to derive its own)
Instead, use your right/freedom to expression, use democracy to your advantage and for the general good
(Why not Vote for the person you like instead of trying to predict who would have maximum votes)
For Investing you would look at inherent qualities of the politician (or that of a company) rather than looking at popularity or mob predictions!
(It all goes back to my yesterday's blog about going against(or at least independent of) the market and Ben's theory on Mr. Market)
I see this as one of the growing problems with the market today...
(To be honest, this is but a reflection of our society today... )
People today are more concerned about what others think and what others are doing ?
"Tell me, what do others think about me ?"
"Will everybody like my new dress ?"
"blah blah blah….because everybody else is doing it… ! "
I see this ("watch out what others are doing") phenomenon is more popular in bull markets (good times) when everyone seems to be doing well...
It is only in bear markets or bad times (failures in life) that people make an attempt to look inward...
I guess that's why we need cyclical markets :)
[A "bear" or "beer" every once in a while is what we all need]
To add further, these days many sites display the average target price of N investors, the average expectation of results of N investors, the average recommendation for a stock based on buy/sell/hold ratings by several analysts/investors…
If you have thought as much and in case you believe this is the right approach, then you obviously understand that Market prices are determined by millions of people and hence they ought to be fair… aha, "The Fair Market theory"...
Unless you have confidence in your intellect and resulting decisions and the strength and patience to stand by it… you are unlikely to outperform the markets…
"More often than not, try to leverage your innate self, your IQ, your creativity/art, your innovativeness, your hobbies, your comforts, your choices, your beliefs, your passion and yourself… you you you" (without being an egoist :))
"Don't undermine your worth by comparing yourself with others. It is because we are different that each of us is special"
Wow, now that reminded me of "The Fountain Head" by Ayn Rand
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