Invesments and
The Greater Fool Theory

QUESTION:

What is your stock REALLY worth?

ANSWER:

Whatever someone else is willing to pay for it at the time!

That's a really true statement as far as you would like it to go!

But it doesn't take into account that the way you arrived at your value will never be able to give you any much-needed ammunition when it comes to justifying your asking price.

Moreover, will not allow you to influence what the prospective buyer is willing to pay!

Stocks are valued by several methods:

They can be priced based on fundamental analysis, risk, technical analysis, market timing, dividend pay outs, growth rates ... dart throwing!

They can even go up in price when bad news hits the market! Example - if a company loses a law suit for 50 million its stock would increase if the market was expecting it to lose 60 million. Here, its price should increase by 10 million!

The stock market is a crazy thing to predict! Stocks are not necessarily priced at what you think the stock should be priced at. They are not even priced by how you think the market will react to the news.

And no, it is not what you think the market thinks that you think the stock price will do.

It is more like what you think - that they think - you think - they think that you think they think!

The point is: Stocks are not only priced on their earnings. They are priced on what people believe they can sell them for. This is called the "greater fool theory!"

The greater fool theory - Buying something for no other reason than the belief that you will be able to sell it to some other sucker for a higher price.

A totally valid method of making money in the stock market  !

The problem is that eventually, the market realizes that the price level has just gotten too outrageous; and the speculative bubble pops.

This happens very fast, one troubling news article could do it. Assets historically increase in value slowly but loose value rapidly, and the price swing gets exaggerated when you are dealing with tulip bulbs or "The Bubble Company."

With that in mind, if you are operating on the greater fool theory in the stock market, it would be prudent to keep on top of the news regarding your bubble company.

Not just keep on top of it, but be all over it!

And of course, remember that good news only inflate the bubble because investors love to speculate based on good news involving their stock, building the market's dream stock up higher.

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The Fool on the Hill