Have a great Thanksgiving everyone. I have alot to be thankful for: family, friends, health, rewarding work, a free country, and great food!
I'll be away for a few days. Have fun.
Showing posts with label cheap post. Show all posts
Showing posts with label cheap post. Show all posts
Saturday, October 11, 2008
Wednesday, August 13, 2008
I'm Bored
Well, I'm not really bored generally speaking since work and life are very busy. I am bored of following our real estate market. It just seems so fatalistic at this stage of the process. We've seen this happen before in a myriad of places at many different times.
- Inventory rises amidst general exuberance about real estate
- Sales fall amidst claims of a 'seasonal' slow down
- Prices stagnate with claims of a rebounding market in the fall/spring/summer whatever
- Developers slash prices and introduce sales incentives with the general populace in denial
- Prices fall modestly as some sellers who must sell come to the realization that price matters!
- Inventory rises further and sales fall even more as the general public becomes aware that real estate does not always go up in value.
- Prices fall dramatically.
- Eventually people will avoid real estate investing and discussions like the plague.
Friday, January 04, 2008
Super Duper Real Estate Advice!
Yes you read that chart correctly. With ONLY A MODEST 5% PER QUARTER INCREASE - - THAT IS ONLY 20% PER YEAR - - the typical Greater Vancouver home will be worth over $9,000,000 in 2020. But we all know the two week long sporting event known as the Winter Olympics are coming and that will boost our housing market even further and 20% OR MORE PER YEAR APPRECIATION IS A SURE THING. Read on if you want to be rich.
Adapted from thereisnohousingbubble.blogspot.com
The advice I'm about to give is for the bold. Frightened little bunnies who are afraid of wealth should read no further.
1) There's a pot of gold at the end of every rainbow and we're all living on rainbow street.
Buy as much house as you can. Don't settle for a $300,000 house when a bank will lend you a million. But the timid out there will say "but I can't afford to buy a house that expensive." Pal, you can't afford not to. Let's employ my favorite friend, the calculator. Let's say you buy a $300K house and I buy a $1 million house. Assuming the standard 20% yearly appreciation rule, after 5 years you'll have roughly $450K in profit (assuming you do not leverage this perpetual cash machine to produce even more wealth).
However, I will have made roughly $1.5 million in profit. As even the most jaded, bitter renter can see, the $1 million dollar home has produced over 3 times as much wealth in only 5 years. Imagine how much better off I'll be in 10 years.
B) - There are no "bad" neighborhoods in Greater Vancouver.
The so-called bad neighborhoods in Greater Vancouver (places like East Hastings, Whalley) have been some of the most profitable homes in real estate history. Today you can not buy a home in these places for under $300,000 and often times these "violent palaces" run over half a million or more.
Even today, after the large run up in prices, these homes are still profitable for the investor with foresight. Let's say you buy a brand new condo in the coveted neighborhood of Whalley for $300,000. As the numbers above show after 5 years of 20% increases you'll have $450K in profit. Let's say you get robbed twice a year, average cost of $5K per robbery, and stabbed or shot every 2 1/2 years costing you $50K in lost wages/hospital bills. $450,000 - 2*5*5,000-2*50,000 = $300,000 PROFIT. I don't know about you but I will take the occasional shiv in the back for $300K every 5 years.
Note: I left out family members being murdered because with proper insurance there should be no net loss for this event. In fact, it could be an equity building opportunity if your loved one had large amounts of insurance. And don't forget, in addition to that treasured Whalley address you get the much sought after Whalley schools and community. You can't put a price on that Vancouver lifestyle.
III. Don't worry, be happy.
Don't worry about the terms of your home loan. Only focus in on the payment. We in the west are no longer squirreling away money like some deranged rodent. No my friend, we are in the cash flow management business (just like how we no longer produce anything in this country, we outsource it all and manage the world). Who cares if the loan is interest only or if the interest costs more than rent. If the payment works, bank it. You can use the guaranteed appreciation to take care of all the details of how you'll pay the money back.
Still doubting? Ask yourself, does a raindrop worry about how to steer the river? No, it sits back and enjoys the ride. Well, there is a river of money flowing right now. You can either let it flow to you or sit by on the banks and watch it pass on by. The choice is yours.
Four) Become the master of your domain.
Become one of the highly trained real estate professionals that are profiting mightily from this new paradigm. Like the previous example let's look at 2 different people. Both are recent high school graduates. One decided to attend an Ivy League school for 4 years to get a degree in one of those outdated majors like engineering or one of the sciences. After graduation they attend grad school for 5 years and get their Ph.D. And now after 9 years of hard, menial, drudgery, what do they get as their reward? A job paying $50-60,000, if they are lucky. By the time this "genius" pays off their student loans they'll be 40 years old. 22 years of eating ramen and riding your bike to work might make some drugged out hippy happy but for us real Canadians we want $$$.
Now let's look at his friend. He decides college is for suckers. He works as a mortgage broker and part time real estate agent. He earns $100-200K a year. By the time Harvard boy has graduated our wise mortgage broker will have a BMW, 2 houses, and a sail boat. And he did all this without wasting his time with books or filling his brain with useless knowledge. He is a producer of wealth while the self-absorbed academic is a parasite on society. What would you rather be, a producer or a parasite?
Wednesday, December 19, 2007
What I Like About Scrooge
In praise of misers. By Steven E. Landsburg
Here's what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.
Scrooge has been called ungenerous. I say that's a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?
Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that's fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.
Dickens tells us that the Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his 50 cooks and butlers to keep Christmas as a Lord Mayor's household should—presumably for a houseful of guests who lavishly praised his generosity. The bricks, mortar, and labor that built the Mansion House might otherwise have built housing for hundreds; Scrooge, by living in three sparse rooms, deprived no man of a home. By employing no cooks or butlers, he ensured that cooks and butlers were available to some other household where guests reveled in ignorance of their debt to Ebenezer Scrooge.
In this whole world, there is nobody more generous than the miser—the man who could deplete the world's resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.
If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar's worth of goods and didn't consume them.
Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you'll bid down the interest rate by just enough so someone somewhere can afford an extra dollar's worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you'll drive down prices by just enough so someone somewhere can have an extra dollar's worth of coffee with his dinner. Scrooge, no doubt a canny investor, lent his money at interest. His less conventional namesake Scrooge McDuck filled a vault with dollar bills to roll around in. No matter. Ebenezer Scrooge lowered interest rates. Scrooge McDuck lowered prices. Each Scrooge enriched his neighbors as much as any Lord Mayor who invited the town in for a Christmas meal.
Saving is philanthropy, and—because this is both the Christmas season and the season of tax reform—it's worth mentioning that the tax system should recognize as much. If there's a tax deduction for charitable giving, there should be a tax deduction for saving. What you earn and don't spend is your contribution to the world, and it's equally a contribution whether you give it away or squirrel it away.
Of course, there's always the threat that some meddling ghosts will come along and convince you to deplete your savings, at which point it makes sense (insofar as the taxation of income ever makes sense) to start taxing you. Which is exactly what individual retirement accounts are all about: They shield your earnings from taxation for as long as you save (that is, for as long as you let others enjoy the fruits of your labor), but no longer.
Great artists are sometimes unaware of the deepest meanings in their own creations. Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions. This is quite independent of all the other reasons why the tax system should encourage saving (e.g., the salutary effects on economic growth).
If Christmas is the season of selflessness, then surely one of the great symbols of Christmas should be Ebenezer Scrooge—the old Scrooge, not the reformed one. It's taxes, not misers, that need reforming.
Tuesday, November 13, 2007
Canadians in Hock
Tip of the hat to reader '/dev/null' for forwarding this news story. Credit card debt is obviously a major problem for many Canadians. It is hard for me to comprehend how much revolving debt many people have and they don't even realize that they are enslaving themselves to the cheap crap they bought on the card.
Growing credit debt is crushing Canadians: study
Updated Tue. Nov. 13 2007 8:46 AM ET CTV.ca News Staff
A new study of Canadians' credit debt finds that a whopping 25 per cent owe between $10,000 and $40,000, and 28 per cent don't even know the interest rate they pay on their main credit card.
The report by Credit Canada and Capitol One was timed for release during their Credit Education Week, and is designed to raise awareness of good financial management.
Laurie Campbell, of Credit Canada, said the numbers -- which don't factor in mortgage debt -- were surprisingly high.
"The numbers are quite startling, even I was quite surprised, but nevertheless, this is truly what we're seeing," Campbell told CTV's Canada AM.
"Savings rates at an all-time low and debt rates at an all-time high so this financial literacy week in my opinion is long overdue."
The study, which questioned 4,000 respondents about their personal credit debt practices, found a disconnect between Canadians' debt levels and retirement plans.
When asked about their total outstanding debt from credit sources and loans, respondents said the following (figures don't include mortgage debt):
$0 -- 16 per cent
$10,001 to $20,000 -- 13 per cent
$20,001 to $40,000 -- 12 per cent
$100,001 to $200,000 -- 9 per cent
$300,001 to $500,000 -- 1 per cent
Two per cent of Canadians said they had six credit cards; while six per cent had five credit cards; 12 per cent had four cards; while the majority, 25 per cent, had two credit cards.
Twenty-two per cent of Canadians said they had only one credit card.
When it came to the average balances people said they carried on their credit cards, 36 per cent said their monthly balance was $0 because they paid off their credit card each month.
Eleven per cent said their monthly balance was between $1,001 and $2,500, 9 per cent had a balance of between $2,501 and $5,000 while 1 per cent had the highest monthly balance of between $20,001 and $30,000.
When asked how their credit card habits could be best described:
50 per cent said they pay their credit card off in full every month.
37 per cent said they pay the minimum requirement each month
10 per cent said they do not have a credit card.
3 per cent said they sometimes/often miss the minimum required payment.
"Certainly what happens with a lot of people is they look at their statement, they see a minimum payment, and say that's what I have to pay and unfortunately they don't look further to find out what the implications of only paying the minimum payment are," Campbell said.
When it came to budgeting, 53 per cent said they have no budget. Another 31 per cent said they have a budget and stick to it, and 16 per cent said they have a budget but rarely stick to it.
When asked when they thought they would be able to retire, respondents said the following:
13 per cent -- never
3 per cent -- between 71 and 76
24 per cent -- between 56 and 60
29 per cent -- between 61 and 65
14 per cent -- between 66 and 70
"The majority of people expect to be able to retire at 60 or 65," Campbell said.
"I don't know how they expect to retire if they're not saving, so there's a real dichotomy between the way people see their future and the way they're handling their money."
When asked what their top concern was regarding credit and debt management, 26 per cent said they worried about not being able to deal with unexpected emergencies.
Campbell said the goal of Credit Education Week is to raise awareness among Canadians about credit debt and how to deal with it, through providing free advice and online resources.
While a strong Canadian dollar has lulled many Canadians into a sense of financial security, people must be cautious, she said.
"People are very optimistic which is a very wonderful thing but you also have to plan for your future and think about where you're spending your money and put your goals in place, that's the most important thing."
Growing credit debt is crushing Canadians: study
Updated Tue. Nov. 13 2007 8:46 AM ET CTV.ca News Staff
A new study of Canadians' credit debt finds that a whopping 25 per cent owe between $10,000 and $40,000, and 28 per cent don't even know the interest rate they pay on their main credit card.
The report by Credit Canada and Capitol One was timed for release during their Credit Education Week, and is designed to raise awareness of good financial management.
Laurie Campbell, of Credit Canada, said the numbers -- which don't factor in mortgage debt -- were surprisingly high.
"The numbers are quite startling, even I was quite surprised, but nevertheless, this is truly what we're seeing," Campbell told CTV's Canada AM.
"Savings rates at an all-time low and debt rates at an all-time high so this financial literacy week in my opinion is long overdue."
The study, which questioned 4,000 respondents about their personal credit debt practices, found a disconnect between Canadians' debt levels and retirement plans.
When asked about their total outstanding debt from credit sources and loans, respondents said the following (figures don't include mortgage debt):
$0 -- 16 per cent
$10,001 to $20,000 -- 13 per cent
$20,001 to $40,000 -- 12 per cent
$100,001 to $200,000 -- 9 per cent
$300,001 to $500,000 -- 1 per cent
Two per cent of Canadians said they had six credit cards; while six per cent had five credit cards; 12 per cent had four cards; while the majority, 25 per cent, had two credit cards.
Twenty-two per cent of Canadians said they had only one credit card.
When it came to the average balances people said they carried on their credit cards, 36 per cent said their monthly balance was $0 because they paid off their credit card each month.
Eleven per cent said their monthly balance was between $1,001 and $2,500, 9 per cent had a balance of between $2,501 and $5,000 while 1 per cent had the highest monthly balance of between $20,001 and $30,000.
When asked how their credit card habits could be best described:
50 per cent said they pay their credit card off in full every month.
37 per cent said they pay the minimum requirement each month
10 per cent said they do not have a credit card.
3 per cent said they sometimes/often miss the minimum required payment.
"Certainly what happens with a lot of people is they look at their statement, they see a minimum payment, and say that's what I have to pay and unfortunately they don't look further to find out what the implications of only paying the minimum payment are," Campbell said.
When it came to budgeting, 53 per cent said they have no budget. Another 31 per cent said they have a budget and stick to it, and 16 per cent said they have a budget but rarely stick to it.
When asked when they thought they would be able to retire, respondents said the following:
13 per cent -- never
3 per cent -- between 71 and 76
24 per cent -- between 56 and 60
29 per cent -- between 61 and 65
14 per cent -- between 66 and 70
"The majority of people expect to be able to retire at 60 or 65," Campbell said.
"I don't know how they expect to retire if they're not saving, so there's a real dichotomy between the way people see their future and the way they're handling their money."
When asked what their top concern was regarding credit and debt management, 26 per cent said they worried about not being able to deal with unexpected emergencies.
Campbell said the goal of Credit Education Week is to raise awareness among Canadians about credit debt and how to deal with it, through providing free advice and online resources.
While a strong Canadian dollar has lulled many Canadians into a sense of financial security, people must be cautious, she said.
"People are very optimistic which is a very wonderful thing but you also have to plan for your future and think about where you're spending your money and put your goals in place, that's the most important thing."
Monday, October 15, 2007
The Story Hasn't Changed - - - Yet
Why the housing slump isn't over yet - By Charles Zentay at thinkinvest.blogspot.com
Bold is mine.
For years, I bored my friends with talk that housing was in for a downturn. No one believed me, and people urged me to buy in before I was shut out of the market. Despite the obvious slowdown in housing, I continue to sing the same tune. I've been doing a lot of reading this weekend about the housing market, and I've concluded that we still have a long way to go before housing reaches bottom. I have been on this soapbox since early-2005 and although the market has not changed in Vancouver yet I still maintain that the market is headed for a drastic downturn. The longer we go without a correction the bigger the correction will be.
Why? The main reason is that in spite of all the whining and moaning about the housing slowdown, prices haven't come down that much (maybe 10%) and affordability is still very low by historical standards.
Here are some other reasons to be wary of housing:
- There is a ton supply out there (supply is at a record, and 2x its normal rate over the last several years). It has just skyrocketed and it is not going down. This is becoming true in our local markets just as it was in the United States.
- Affordability for new home buyers is still at lows.- More people own houses than ever before (meaning fewer buyers out there). Vancouver has THE WORST affordability in North America.
- The Fed will have trouble lowering interest rates in the face of $85 oil and a Euro of 1.42. Can you say INFLATION?
- Credit standards are tightening, meaning fewer mortgages and therefore fewer buyers. This is also true in the Vancouver market although to a lesser extent.
- A large amount of ARMs are still resetting, with a tremendous amount due to reset in the second half of 2008. ARM resets are leading to more foreclosures, and therefore even more supply. British Columbia has the highest product adoption of variable rate mortgages in Canada, with many mortgagees having a negative amortization now.
- Homebuilders are under enormous pressure with debt coming due and therefore will be willing to dramatically lower their prices. Vancouver has a tremendous amount of new home supply coming available in the next 12 - 24 months and demand that is drying up. Developers will cut prices when they realize that nobody is buying.
- The economy seems to be softening, with economists raising the chances of a recession. If you think that the Vancouver economy can sustain itself and is immune to external shocks you are deeply deluded. The high CDN$ is hurting exports (lumber, manufactured goods, technology, etc), film-making (Hollywood north anyone), and tourism (the supposed golden egg of 2010).
- Cap Rates (the income from rents) are still very low, making housing an unattractive investment. Duh! Real estate is about the worst investment possible right now - if you don't believe me get a calculator, paper and pencil and DO THE MATH.
- All of the above is leading to a change in the mentality towards housing. It is going from something people want to own to something to be wary of. This change in attitude towards housing can take a long time to set in and have a tremendously negative effect on pricing. Apparently Vancouverites are still in lala-land when it comes to this psychology shift but it will come swift and sure.
Frankly, the only bright spot I see in housing is that the weak dollar is leading to more foreign buying of U.S. real estate (in places like New York), but the effect of this buying is minimal compared to the other negatives. I just don't see other positives.I think owners are stubborn and resistant to lower prices. Therefore, the market is not correcting itself quickly. The slowdown is likely to last several years.
Until Cap Rates are higher than Mortgages Rates (meaning it actually pays to be a landlord), I think the market will continue to head down. Unfortunately, we're not even close to having attractive Cap Rates. I wouldn't be surprised if a major homebuilder declares bankruptcy in the next 6-12 months. I also wouldn't be surprised if homebuilders and banks start to move to more aggressively clear inventory, which will lead to big price declines. Look for this to happen in our area in 18-24 months.
Bold is mine.
For years, I bored my friends with talk that housing was in for a downturn. No one believed me, and people urged me to buy in before I was shut out of the market. Despite the obvious slowdown in housing, I continue to sing the same tune. I've been doing a lot of reading this weekend about the housing market, and I've concluded that we still have a long way to go before housing reaches bottom. I have been on this soapbox since early-2005 and although the market has not changed in Vancouver yet I still maintain that the market is headed for a drastic downturn. The longer we go without a correction the bigger the correction will be.
Why? The main reason is that in spite of all the whining and moaning about the housing slowdown, prices haven't come down that much (maybe 10%) and affordability is still very low by historical standards.
Here are some other reasons to be wary of housing:
- There is a ton supply out there (supply is at a record, and 2x its normal rate over the last several years). It has just skyrocketed and it is not going down. This is becoming true in our local markets just as it was in the United States.
- Affordability for new home buyers is still at lows.- More people own houses than ever before (meaning fewer buyers out there). Vancouver has THE WORST affordability in North America.
- The Fed will have trouble lowering interest rates in the face of $85 oil and a Euro of 1.42. Can you say INFLATION?
- Credit standards are tightening, meaning fewer mortgages and therefore fewer buyers. This is also true in the Vancouver market although to a lesser extent.
- A large amount of ARMs are still resetting, with a tremendous amount due to reset in the second half of 2008. ARM resets are leading to more foreclosures, and therefore even more supply. British Columbia has the highest product adoption of variable rate mortgages in Canada, with many mortgagees having a negative amortization now.
- Homebuilders are under enormous pressure with debt coming due and therefore will be willing to dramatically lower their prices. Vancouver has a tremendous amount of new home supply coming available in the next 12 - 24 months and demand that is drying up. Developers will cut prices when they realize that nobody is buying.
- The economy seems to be softening, with economists raising the chances of a recession. If you think that the Vancouver economy can sustain itself and is immune to external shocks you are deeply deluded. The high CDN$ is hurting exports (lumber, manufactured goods, technology, etc), film-making (Hollywood north anyone), and tourism (the supposed golden egg of 2010).
- Cap Rates (the income from rents) are still very low, making housing an unattractive investment. Duh! Real estate is about the worst investment possible right now - if you don't believe me get a calculator, paper and pencil and DO THE MATH.
- All of the above is leading to a change in the mentality towards housing. It is going from something people want to own to something to be wary of. This change in attitude towards housing can take a long time to set in and have a tremendously negative effect on pricing. Apparently Vancouverites are still in lala-land when it comes to this psychology shift but it will come swift and sure.
Frankly, the only bright spot I see in housing is that the weak dollar is leading to more foreign buying of U.S. real estate (in places like New York), but the effect of this buying is minimal compared to the other negatives. I just don't see other positives.I think owners are stubborn and resistant to lower prices. Therefore, the market is not correcting itself quickly. The slowdown is likely to last several years.
Until Cap Rates are higher than Mortgages Rates (meaning it actually pays to be a landlord), I think the market will continue to head down. Unfortunately, we're not even close to having attractive Cap Rates. I wouldn't be surprised if a major homebuilder declares bankruptcy in the next 6-12 months. I also wouldn't be surprised if homebuilders and banks start to move to more aggressively clear inventory, which will lead to big price declines. Look for this to happen in our area in 18-24 months.
Monday, September 17, 2007
Greenspan alert on US house prices
Hello Everybody,
Sorry for having fallen off the face of the Earth lately. I'll try to be more reliable now that the rain seems to have come back.
This is a slightly cheap post, but I think an important one. In yesterday's Financial Times Alan Greenspan had some of the following choice comments:
US house prices are likely to fall significantly from their present levels
...the decline in house prices “is going to be larger than most people expect”.
He said the price of risk had fallen to unsustainably low levels beforehand, with investors addicted to asset-backed securities that offered some additional yield over Treasury bonds as if they were “cocaine”.
Interesting that Greenspan is finally acknowledging a situation he helped create. We also pick up this tidbit:
As Fed chairman, Mr Greenspan had talked about “froth” in the housing sector, but never said there was a bubble in the market as a whole. His successor Ben Bernanke has also avoided the word “bubble”.
But Mr Greenspan told the FT that froth “was a euphemism for a bubble”.
He said he still thought froth – a collection of bubbles – was a better description, because of the variation in house price appreciation in different local housing markets. But he said “all the froth bubbles add up to an aggregate bubble”.
Tuesday, September 11, 2007
Greater Fool Theory
From Investopedia.com
A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.
When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip it quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.
From Wikipedia:
The bigger fool theory or greater fool theory (also called Survivor Investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to some one else for an even higher price.
It might be on some occasions a valid method of making money in the stock market -- however, the market participants eventually realize that the price level is too outrageous and the speculative bubble pops. The bigger fool theory relies on market optimism concerning a particular stock, an industry, or the market as a whole.
The opposite of the bigger fool theory is value investing, which tries to discount market psychology. Value investors such as Warren Buffett believe that it is corporate profits which are the normal returns from stock investments, and any higher return is only possible due to the bigger fool theory.
The bigger fool theory holds for any pure value transaction, not just speculative ones. When a commodity with a universal value is traded then, no matter how the situation is interpreted, either the seller or the buyer has made a mistake.
However, the majority of transactions are not pure value transactions: the value (or utility) that a given product has is dependent on a wide variety of factors, which will often be very different between the buyer and the seller.
For instance, in a bartering economy, there might be a tomato farmer living next to a cherry farmer. The tomato farmer has a large supply of tomatoes, and very little demand, so for him tomatoes have very little value; but he has a small supply of cherries and a higher demand, so for him they are much more valuable. The situation is reversed for the cherry farmer, so a trade of tomatoes for cherries would be a profitable transaction for both parties.
A theory that states it is possible to make money by buying securities, whether overvalued or not, and later selling them at a profit because there will always be someone (a bigger or greater fool) who is willing to pay the higher price.
When acting in accordance with the greater fool theory, an investor buys questionable securities without any regard to their quality, but with the hope of quickly selling them off to another investor (the greater fool), who might also be hoping to flip it quickly. Unfortunately, speculative bubbles always burst eventually, leading to a rapid depreciation in share price due to the selloff.
From Wikipedia:
The bigger fool theory or greater fool theory (also called Survivor Investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a bigger fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to some one else for an even higher price.
It might be on some occasions a valid method of making money in the stock market -- however, the market participants eventually realize that the price level is too outrageous and the speculative bubble pops. The bigger fool theory relies on market optimism concerning a particular stock, an industry, or the market as a whole.
The opposite of the bigger fool theory is value investing, which tries to discount market psychology. Value investors such as Warren Buffett believe that it is corporate profits which are the normal returns from stock investments, and any higher return is only possible due to the bigger fool theory.
The bigger fool theory holds for any pure value transaction, not just speculative ones. When a commodity with a universal value is traded then, no matter how the situation is interpreted, either the seller or the buyer has made a mistake.
However, the majority of transactions are not pure value transactions: the value (or utility) that a given product has is dependent on a wide variety of factors, which will often be very different between the buyer and the seller.
For instance, in a bartering economy, there might be a tomato farmer living next to a cherry farmer. The tomato farmer has a large supply of tomatoes, and very little demand, so for him tomatoes have very little value; but he has a small supply of cherries and a higher demand, so for him they are much more valuable. The situation is reversed for the cherry farmer, so a trade of tomatoes for cherries would be a profitable transaction for both parties.
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