The Greater Fool Theory

                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              

This week we celebrated (if that's the right word) the 30th anniversary of the 1987 stock-market crash.

I heard an N.P.R. interview a couple days ago with a woman who's written the story of that event.  She mentioned, which I'd never realized, that the little-remembered 1987 market collapse was worse than either the 1929 or the 2008 crashes.

She placed the blame on the computer trading-strategies of the time: that when any stock started to go down, the computers were automated to sell...driving the stock-price further into decline.

She didn't say; and I'll have to leave to people who understand better than I do the workings of the economic system...which is most people; what part seven years of Reaganomics played in the crash.

I remember listening to "Morning Edition" that day as I was sorting mail at the Post Office.  Bob Edwards, the show's host at the time, asked a financial expert why the crash had involved even "blue chips:" the stocks of companies considered rock-solid in any crisis.

I have never forgotten the expert's answer.  (It is in fact the cornerstore of the sparse understanding I have of how Wall Street works.)

You have to remember, he said, that the stock-market operates by the Greater Fool Theory.  My remembrance is that Bob Edwards chuckled as he said, "The Greater Fool Theory ?  What's that ?"

Investors don't buy stocks because they believe in the issuing company, said the expert, or because they believe in the company's product.  An investor purchases a stock because he believes that, in the future, a greater fool will pay a higher price for it.