The Greater fool theory is an economic theory, popularized in the stock market which postulates that it is possible to make money from buying overvalued securities, as long as there is someone willing to pay an even higher price or buy the same asset at a higher price in a different market.

The theory is based on the idea that you can still profit from buying a security even if it is overvalued, because you will likely find someone who is willing to pay an even higher price, i.e a greater fool. This cycle can continue until the market runs out of greater fools to replace the current buyer. At this point, prices will begin to sell-off and investors might see losses or simply break even. This can be seen fairly clearly during a bubble cycle, where prices increase significantly past the point of intrinsic value, as investors continue to buy and push the price up, based on the belief that they can still generate a profit from it.

It is important to note that, while the Greater fool Theory stands that it is often possible to make money from these types of overvalued securities, it does not recommend this as a long term strategy. In fact, it can be extremely risky to invest in securities that are significantly overvalued, as it is difficult to particularly ensure a return on such investments.

Therefore, it is generally recommended that investors use caution when considering investing in securities based on the Greater fool Theory, and instead employ sound asset allocation and due diligence before considering investing. This can help investors avoid the possibility of becoming “the fool” themselves in such an investment.

Ultimately, the Greater fool Theory states that it is possible to make money from buying overvalued securities, but investors should exercise caution before investing in this manner. It is also important to remember that you may become the fool yourself if you invest without doing your research and due diligence.