Most people think they are long-term investors, even though they act like bad traders. They buy stocks when prices are rising. They rarely do any substantive analysis to determine if they are overpaying for what they are buying. They buy stocks with every intention of holding them for a long time, or because they are confident prices will continue to rise, and the stocks can be sold for a profit at a later date. They never realize that those missteps define Wall Street’s greater fool theory. The other equally destructive part of the theory is selling in panic stocks that were bought in confidence.
No one wants to admit they lost money. It is easier complaining that the stock market is rigged, and banks and hedge funds are corrupt, than to confront the fact that the great crowd that comes to Wall Street to make money mostly “greeds in and panics out.” The crowd rarely learns much of anything from boom to bust and back again. This behavior, when viewed from a nonfinancial perspective, is peculiar. People who have been mugged, or whose houses have been robbed, would immediately try to better protect themselves. They might take a self-defense class. They would get street-smart very fast. But people get mugged on Wall Street every single day and their behavior rarely changes.
In 1984, when the United States was starting to get mad for stocks and mutual funds and the foundation was being laid for the cult of equities that now defines the United States, DALBAR, a financial ...