Safely Prosperous or Really Rich: Choosing Your Personal Financial Heaven

Chapter 8

The Bigger-Fool Theory of Investing

The stock-market bubble of the late 1990s inflated because investors (speculators?) assumed that if they paid a foolish price for a stock, they would be able to sell it to a bigger fool.

Ignoring the importance of intrinsic value in picking stocks to invest in during the 1990s is by far the most foolish thing done by the most investors during my quarter century as a financial publisher. It was a universal epidemic! It worked for awhile as the market soared to unsustainable heights, driven by investors (speculators?) who assumed that even if they paid a foolish price for a stock, a bigger fool would come along and pay them an even more foolish price. Understanding the importance of real value made fortunes for a few investors who were lucky enough or smart enough to sell at or before the peak of the bull market in March or April of 2000. They understood that at those prices, most stocks were worse than lousy values, and they would go higher only if investors were willing to pay ridiculously higher prices. But most Americans who bet on the biggest stock bubble since 1929 when it was full of lousy values still own their deflated stocks and mutual funds in individual investment accounts as well as in their 401(k)s, and have been hurt big time. As this is written, the carnage is far from over, and millions of investors are still holding onto their big losers like grim death, emotionally incapable of admitting they made a terrible value ...