Investing BlogGreater Fool Theory
Greater Fool Theory by Jordan at Investing Blog
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In terms of the Greater Fool Theory, I have often found myself part of the “Greater Fool.” The Greater Fool Theory contradicts the discounted cash theory in that it says the assumption that investors aren’t always rational, and aren’t always interested in pure cash flow. Short term investors frequently become part of the Greater Fool when they buy a stock for quick capital appreciation before a earnings report. Investment bankers are part of the Greater Fool when they buy and sell stocks quickly, with no respect to the underlying fundamentals using high frequency trading programs designed to shave pennies off dollars. To the Greater Fool, the business the ticker symbol represents isn’t important. What’s important is the value of that ticker symbol. Making Money on the Greater Fool The Greater Fool is God’s gift to fundamental investors. Since the collective investor is not interested in the fundamentals, fundamentalists may be able to buy a stock for cheaper than what the discounted cash flow theory might say its worth. For example: In a perfect market, one that is rational and depends solely on cashflow and business operations, Microsoft stock might be worth $25 per share. However, the Greater Fool, technical investors for instance, notice that Microsoft is heading towards a resistance point and start selling in mass. Microsoft stock then falls to $22 per share from $23, a total of $3 from where the discounted cash flow theory would say Microsoft should be priced. A Greater Debate This theory is part of a much larger debate about market mechanics. (I wrote about this briefly with my post “Right or Right First.”) The technical investor argues that those interested in pure cashflow are leaving themselves to vulnerability to the market movements. Fundamentalists might say that technical investors are ignoring what makes businesses more valuable: more profits. About Jordan Jordan is the web master of www.investingblog.org, a site dedicated to skillful investing, news and recent trends. You can read the original article here. Subscribe to our RSS feed to stay up to date or follow us on Twitter or Facebook. Subscribe to our newsletter to receive regular updates on the site: Return to the Investing Blog section Read The Martial Artist's Guide to Investing Return to the Martial Arts Insight Home Page |