The Greater Fool Theory proposes that you can profit from investing as long as there is a greater fool than yourself to buy the investment at a higher price.
The Greater Fool Theory proves itself best at continuous bull markets, where everybody seems to rush in investments because of the high momentum of equities. But as Sir Isaac Newton noted “Every thing that goes up must come down” readjusting the investment to its true value.
This means that you could make money from an overpriced stock as long as someone else is willing to pay more to buy it from you. Eventually you run out of fools as the market for any investment overheats. Investing according to the greater fool theory means ignoring valuations, earning reports and all the other data. And Ignoring data is as risky as paying too much attention to it; so people ascribing to the greater fool theory could be left holding the short end of the stick after a market correction.
Manias or Bubbles are a true example of The Greater Fool Theory Bubbles had not been a one time deal in the stock market’s history, but we seem to “rush in” the hype every time we see the opportunity to make a quick buck.
The Risk involved by buying any sort of investment for the sole reason that it increased drastically in momentum is nothing but absurd. Only few lucky investors get out of the rush profitable, leaving the majority of investors holding investments too highly overvalued it becomes hard to turn them into a profit and sometimes they are even forced to default of the investment.
And if you haven't learnt the lesson in 2008 you can always jump in the Bitcoin mania right now to test The Greater Fool Theory in person.