The Greater Fool

From Saturday’s FT comes this:

What we have here is the Greater Fool Theory. This says that even though you are perfectly aware a thing is overvalued… you keep buying it anyway. Why? Because the thing is still going up. When the time comes, you will find a Greater Fool to take it off your hands. Until, of course, the music stops, and the Greater Fool turns out to be you.

Change a few of the words and this is pretty much what happens periodically (in a prolonged soft market) with spirals. I was very heavily Unicover and the PA LMX spiral and, believe me, everyone involved knew what was going. All these guys standing up and saying that they had no idea when they put their lines down that this would be loss-making business on a gross basis – not really credible. Especially when they were often explicitly unable to commit until they had their own retro in place, who would of course be buying at an even lower price. As long as they weren’t Tail End Charlie, no one cared.

I always thought, with the very greatest respect to him – I was involved in a long (6 years) arbitration where he was Umpire and he is very, very bright – that perhaps Mr Justice Thomas did not really grasp, or perhaps ‘believe’ is the better way to put it, that that was the case. In the Euro International judgment, he seemed to think that there was one Bad Man and one Patsy, and that everyone else along the way was uninvolved. They were, in one sense, but in truth everyone between those two extremes knew what was going on.

They were all looking for the Greater Fool. And in almost every case found him.