The Great Idiot Theory: The Risks of Top-Down Management

The Greater Fool Theory: Risks of Buying at the Peak

A concept frequently encountered in the finance world, the "Greater Fool Theory" explains how the value of an asset is influenced more by the stories shared among people than by its price. Markets can sometimes stray from complex mathematical equations and shape themselves based on expectations. At this point, the most crucial aspect for investors to consider is to question the story behind rising prices.

Historical Examples: Tulip Bubble and South Sea Company

The history of this theory dates back to the 1700s. For instance, the tulip mania in Holland caused the prices of tulip bulbs to rise to the level of a house. Prices increased because everyone thought that the next buyer would pay more, but eventually these assets became worthless. Similarly, in 1720, the shares of the South Sea Company skyrocketed from 128 pounds to 1000 pounds based entirely on speculation. However, when the anticipated commercial success did not materialize, prices quickly fell back.

Risks of Buying at the Peak

Today, we must be cautious in the markets; because the value of an asset may only be determined by stories. Investment vehicles such as cryptocurrencies, AI stocks, or precious metals can experience significant price increases during certain periods. However, an increase in price does not necessarily indicate that the asset is truly valuable. In times of crisis, uncertainties and speculations are among the factors that affect asset prices.

What to Do to Avoid Being a Greater Fool

The most important question to ask in the finance world is: "Will the next buyer be willing to assign more value to this asset?" Before investing, we should thoroughly evaluate the value and risks of an asset. When you see a price increase, it is vital to question the dynamics behind this rise. Remember, maintaining a questioning mindset is essential when making investments.

In conclusion, while it is important to be enchanted by stories and follow trends; the fundamental rule is always to question and be cautious. Taking risks by buying at the peak can lead to potential losses.