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I recently wrote an article on the theory of the Greater Fool.

This reminded me of someone I used to work with who took early retirement from the place we were working at.
As part of his retirement package he received a lump sum payment.
This person had always played the stock market, and so, upon leaving he set aside £12,000 (almost $24k at todays rates) to invest in stocks and shares.

He used to visit us at work from time to time and I sometimes spoke with him about the state of his investments.

Within less than 12 months he had turned £12,000 into £36,000 in terms of share value. However, he had not actually sold off his shares. Others tell me that “you have never made money on the stock market until you sell the shares”.

I asked him what kind of companies he had been the most profitable, to which he replied “technologies”.

This was at the time when dot com companies were soaring in value on the basis predicted future market share. Everyone knew the internet would grow and that large online companies would be established. They were therefore investing in companies with “first mover advantage” in particular areas, speculating that they would, within a couple of years be worth huge sums.

I warned this investor that he should take his money out of these companies explaining that many were little more than a bunch of students with a hair brained idea in a rented office.

He did not accept my argument, claiming that these stocks had been doing well in the US for some time.

Shortly after our conversation the press began to report the stories that supported what I had tried to explain to him, that these companies were vastly over valued and did not actually “have anything”.

Shortly after that the market collapsed.

Unfortunately, the person I knew lost all their profit and some of the original investment capital.

This is “Theory of the Greater Fool” in action.

The person I knew was warned (by myself) that the companies he had invested in were over valued.

The true value of his investments did not concern him as he gambled finding a “greater fool” to sell them to at a later point.

Gambling on finding a “Greater Fool” is actually a viable approach to investment, but only if you get out before the bubble bursts!

If the person I knew had sold his shares at the right time he would have made £24k, regrettably, he himself ended up the “Greater Fool”.

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    6 Comments

    Comment by Acopic Web Design

    Well he can take some comfort from the fact that he wasn’t the only ‘Greater Fool’. I think a lot of people lost out and it’ll probably happen again soon – with the likes of MySpace fading fast.

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    Comment by SiteLogic

    I was really surprised he got caught out, he knew a I lot about investing… got a bit too greedy I suppose.

    I don’t see it happening again on that scale, there is not the level of venture capital poured into empty ideas that there was then.

    People were literally going approaching students and offering them £100k for a little websites with a handful of readers… for a couple of months it was utter madness… at the time I wished Id thrown up a couple of crappy sites of my own… If I thought there was even the slightest possibility of the World Going Mad like that I would have built hundreds ;-)

    Comment by David Hopkins

    Instead you wainted a few years before throwing up a crappy site. just kidding :razz:

    I had never thought of the stock market as a pyramid of control. I guess it probably is with Tiny Rowlandesqe cartels grouping up and moving in unison.

    Comment by SiteLogic

    I waited till there was no money in it before throwing up a crappy site.

    I dont think the stock market is a “pyramid of control” but it is succeptable to hype like anything else…

     
     
     
     
    Comment by Florchakh

    Do you remember the story of The Hunt Brothers and the Silver Bubble? :cool:

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    Comment by SiteLogic

    No but a Jeweller told me about the prices at that time…. saying they were melting down beautiful antiques for scrap and what a shame that had been.

    I had not realised the cause of the hike though!!

     
     

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