Bigger fools exist in the world of investing, as evidenced by a plethora of evidence. Here is an explanation of the “biggest fool theory” and how it applies to investing.
The bigger fool theory states that one can make money buying overvalued stocks because there will always be someone who, in that case, is a bigger fool, who is willing to stupidly pay an even higher amount.
What is the big fool theory?
An economic event whereby the prices of individual assets rise ridiculously and supersede their real value is called a market bubble.
Bubbles are generally considered outrageous explosions. Bubbles are generated, and its self-perpetuating waves of optimistic values that drive up asset prices and cause misallocated investments only survive bubbles.
There is confusion among leading scholars or financial practitioners to agree on the particular reason why an asset bubble develops or what exactly keeps prices overvalued for the life of the bubble.
The “big fool theory”, on the other hand, is a widely debated theory about chasing a bubble.
The big fool’s theory for a market bubble holds that an individual can benefit from acquiring very expensive and overpriced assets and give them away for additional profit, because there is certainty that there will always be that individual. who will pay an even higher price to obtain assets. Any investor hoping for the big fool theory would surely acquire overpriced assets without considering their intrinsic value.
This speculative system is entirely based on the idea that an individual can make a profit by betting on the future prices of assets and on the belief that there will always be a “bigger fool” willing to pay more than the assets have. been obtained.
Eventually, the bubble would certainly burst and thus begin the huge amount of asset selling which would equate to a decline in the price and value of the assets. It would be unfortunate if an individual was the last to acquire the asset without a buyer during the sale period, which could represent a huge loss of money and even lead to bankruptcy.
In the field of stocks, the big fool theory becomes relevant when there is a drastic increase in stock prices and it is expected that there will generally be a buyer willing to pay for stocks even at this high rate rather than the value attached to the business or the income earned by the business.
With this belief, regardless of the stock price, this is sustainable as it is assumed that eventually a buyer would be available to acquire assets or stocks at an even higher price.
Intrinsic value and the big fool theory
We will venture into the digital asset market to understand the Big Fool Theory. The rise of Doge and Shiba Inu, the two most popular coins, has turned many investors into multi-millionaires and even billionaires. While testimonials of how most people made huge sums of money come out.
Many “Big Fools” who are willing to pay with the belief that they can get rich without considering intrinsic value and relying only on rising asset prices, are then lured in.
Example of the big fool theory
The “big fool theory” at work
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Many of these same coins turned out to be purely fraudulent. For example, the case of the meme coin attributed to “Squid Game”, the famous South Korean Netflix movie released in 2021.
Even bitcoin is no exception. Bitcoin has a questionable intrinsic valuation and consumes a huge amount of energy, exists as a series of codes stored in a computer network, and is also a major concern for the ecosystem. Despite all these concerns, bitcoin prices rose and sellers never needed to find buyers.
Prior to 2018, it had reached the price of $20,000 before depreciating. Traders and investors were lured by price trends and quickly invested and sold bitcoin simply because they thought they would later sell it to a bigger fool.
The price of this cryptocurrency skyrocketed due to the big fool theory as the demand was greater than the supply.
And a few years later, the price had exceeded expectations to rise to $60,000 and not settle below $50,000 for months. This is due to investments made by large institutional investors and corporate finance bodies like Tesla and PayPal. Tesla incorporated bitcoin to buy Tesla products until the idea was rejected due to greenhouse effects on the earth, thus causing the price of the cryptocurrency to plummet.
The Pros and Cons of Using the Biggest Fool Theory
The Big Fool Theory relies on perfect timing and strategy. There are high chances of acquiring a lot of profits with this more silly strategy. Although mastering this strategy and determining the ideal time for your assets to generate interest is a Herculean task, unless you study the fundamentals and market forces beyond the excitement of short-term investing. .
He shouldn’t be surprised when the eagerness to invest in an asset wanes or shifts towards fundamental-based valuation, leaving an individual with assets that are steadily declining in value.
Individuals who invest in assets without respecting the fundamentals create valuation bubbles. It can overcome a big loss when the bubble bursts.
A well-known value investor, Benjamin Graham, once said that “in the short term a market is a voting machine, but in the long term it is a ladder”. Graham was trying to explain that. While popular sentiment influences short-term stock price action, fundamental value such as revenue, earnings, cash and debt determine the performance of a company’s stock over longer periods of time.
It is possible to get high returns using the biggest fool strategy. However, this carries high risks and is far from the best route to long-term success.
How to avoid paying the highest price
Now that the concept of the bigger fools theory has been understood, it is important to avoid becoming a victim of paying a higher price and becoming a bigger fool. And you can do it simply by doing the following.
- Avoid buying stocks just because of their rising price. Nothing can be predicted in stock trading with 100% accuracy. The market is not stable as it runs on different trends. Assets with a high percentage of interest and highly sorted can lose interest overnight or be inflated according to market trends.
- Before investing, make sure you carry out proper research and thorough market analysis. Be sure to plan well and be sure to implement your plans. To avoid a bubble situation, plan for the long term.
- Don’t follow the crowd by paying higher prices for a property. Especially with little or no value simply because a large population of individuals does the same with the assumption that the price will continue to soar.
- Be sure to avoid greed and the temptation to make big bucks. Especially over a short period of time before investing in a business.
- Your investment portfolio should be diversified. Include many securities and assets based on high performance and credibility in the portfolio.
- Don’t overinvest. Manage risks accordingly.
One of the main takeaways from this article is that investors need to take steps to master investment strategy. Next, understand how to manage decisions, the effects of the decision, and methods for making effective decisions.
They should also learn about business ownership to understand who owns the lion’s share of a business. Also, who has the highest voting power in the others not to become the biggest fool and buy potentially overvalued assets?