jacob wrote: ↑Thu Jan 21, 2021 9:20 am
..."why equities?" of all things. For a "greater fool"-trade...
a) The majority of stock investors are either ignorant to the very idea of the major stock indices being overvalued and a "greater fool" trade.
b) Of those who are aware, most don't care: "I'm dollar cost averaging 10% of my paycheck for decades"; "I know stocks are overvalued but I know I shouldn't try to time the market either"; "I'm a fund manager who can't lag the market too much or I'll be fired"
c) Of the remaining minority who are aware of the "greater fool" trade, some percent opt out until there is a better opportunity
d) For the others who still participate, I imagine the vast majority would be active investors/traders who have a plan in place to sell rather than be willing to buy/hold at extremely high valuations & sentiment and do absolutely nothing while the values decline 60% or so. They would likely believe that their strategy is above average, so that even if active stock trades are a zero-sum game or a negative-sum game once we're in a bear market, they would believe their strategy would earn them positive returns or at least beat the market (say a 10% loss instead of a 50% loss).
e) Finally there may be a small minority of the small minority, who understands that they are in a greater fool trade, who still opt in to such a trade, and who realize that the expected return of zero in a zero-sum game (or negative in a negative-sum game) applies to them because they are not superior investors. I imagine this small group of people would be only betting a small amount of money for a combination of excitement and trying to build skills in such an endeavor. They are willing to lose that amount of money for various reasons, as illogical as they may be. I also imagine the majority of casino and lottery players are not complete idiots and understand that the odds are against them.
Anyway, all that is to say that I don't think it makes sense to paint the majority of holders of any overly expensive asset as people who are trying to profit from a "greater fool" trade. Having said that, the small majority of intentional "greater fool" traders of course don't only participate in equities buy also in gold and other commodities, cryptocurrencies, etc. But it wouldn't make sense to play that game with something that isn't currently both popular and volatile, and it wouldn't make sense to try something you're completely unfamiliar with. So equities checks the boxes of popularity, volatility, and familiarity. Cryptocurrencies increasingly so, particular with the younger crowd.
On the other hand, it wouldn't make sense for one to try a "greater fool" trade with tulip bulbs in 2021 without the volatility and popularity, even if one is an expert on tulip prices. But in the fall of 1636, after tulip bulb prices had already tripled the past year, you still would have had about 6 months to find a greater fool at up to 10x the price you paid. Not a bad trade if you can recognize when the supply of greater fools is slowing down.