"Greater Fool Theory" is the name given to the idea that you only buy something with the hope that someone pays more for it in the future. Since the Bitcoin investment craze has come about, many serious investors including Warren Buffett and Bill Gates have started talking about cryptocurrencies in terms of the Greater Fool Theory.
"Surely hoping for someone else to buy your asset for more than you paid for it is common to all investments" you ask? Well sort of... but only to a certain extent.
At RetireOnDividends, we focus on buying PRODUCTIVE assets and we hope you will too. This means the underlying asset actually throws off an income for you each year.
Assets such as stocks which, after all, are part of a business should pay you dividends over time. Bonds and cash pay you interest. Property pays you rent. This ability to produce gives the asset some intrinsic value and as a result you can make a good return no matter what the price of the asset does.
If you buy assets that DO NOT produce anything, then you're relying on the next buyer to pay a higher price when you sell in order to make a return. And as the asset is not producing anything at that point either, you are effectively searching for a "Greater Fool".
Typically the following:
Price increases on these "assets" are entirely at the mercy of sentiment towards them at the time you wish to sell. If people believe they can sell them on at a further profit, you may well be able to make money, but sooner or later this kind of speculative bubble is likely to burst.
As Warren Buffett puts it in the following video, "all you're hoping for when you buy a non-productive asset is that you'll be more excited about it when I want to sell it than I am... but when you buy a productive asset, buy the time you come to sell it you've got not just what you bought in the first place, but you've had some significant income from it in the meantime".
For another take on Greater Fool Theory, click here