Trading With The Greater Fool Theory

Trading With The Greater Fool Theory

This has been shared many times in many forms online and I can not find the original source but it is a great analogy on how bubbles work as people buy things far above what they are worth until they run out of buyers at higher prices. It is the game of the greater fool. These bubbles can happen in growth stocks, penny stocks, tulips, real estate, bonds, and even crypto currencies. 

The greater fool theory states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price. – Wikipedia 

A lot of monkeys lived near a village.

One day a merchant came to the village to buy these monkeys!

He announced that he will buy the monkeys at $100 each.

The villagers thought that this man is mad.

They thought how can somebody buy stray monkeys at $100 each?

Still, some people caught some monkeys and gave it to this merchant and he gave $100 for each monkey.

This news spread like wildfire and people caught monkeys and sold it to the merchant.

After a few days, the merchant announced that he will buy monkeys at 200 each.

The lazy villagers also ran around to catch the remaining monkeys!

They sold the remaining monkeys at 200 each.

Then the merchant announced that he will buy monkeys at 500 each!

The villagers start to lose sleep! They caught six or seven monkeys, which was all that was left and got 500 each.

The villagers were waiting anxiously for the next announcement.

Then the merchant announced that he is going home for a week.  And when he returns, he will buy monkeys at 1000 each!

He asked his employee to take care of the monkeys he bought.  He was alone taking care of all the monkeys in a cage.
The merchant went home.

The villagers were very sad as there were no more monkeys left for them to sell it at $1000 each.

Then the employee told them that he will sell some monkeys at 700 each secretly.

This news spread like fire.  Since the merchant buys monkey at 1000 each, there is a 300 profit for each monkey.

The next day, villagers made a queue near the monkey cage.

The employee sold all the monkeys at 700 each.  The rich bought monkeys in big lots.  The poor borrowed money from money lenders and also bought monkeys!

The villagers took care of their monkeys & waited for the merchant to return.

But nobody came!  Then they ran to the employee.

But he has already left too!

The villagers then realized that they have bought the useless stray monkeys at 700 each and were unable to sell them!

Each bubble is the next monkey business

It will make a lot of people bankrupt and a few people filthy rich in this monkey business.

That’s how it will work.

Buyer beware.