Greater Fools

I read an article recently about an American company called Webvan who delivered grocery orders placed via the Internet. To cut a short story short, the company’s valuation increased from $375million to $8.5billion on the day the stock went public, but within two years, the company was bankrupt.

But the part that caught my attention was this:

“But it wasn’t just faith in the Internet that led speculators to bid up Webvan’s price. They also had faith that other people believed even more fervently in the Internet’s potential. In short, people who paid a foolish price for Webvan and hundreds of other Internet firms figured they could always find a greater fool to pay an even higher price. And many did…”

Now this is one time when, as a trader, “value” really doesn’t matter. All that matters is that your valuation differs enough from someone else’s valuation, and that you are able to trade out of your position with a profit.

Of course, the problem with this kind of trading is that at some point you will run out of greater fools, or more specifically, greater fools willing to risk enough money.

This is certainly a situation I have found with the betting exchanges. I have a tendency to go in big or not at all, and while the bet may prove to be value, at least for a time (as evidenced by a certain percentage being taken), the in-play markets can move so fast that in illiquid markets, they turn against me and I am sometimes left with a position that I have to take a loss on.