Categorized | Domaining Tips

The Greater Fool Theory – Domaining Implications

Posted on 09 April 2019 by Andrei

Sometimes, assets reach valuations that just don’t make sense. For example, companies that don’t make any money and probably never will but are the cool kid in town. Or Dentacoin (a cryptocurrency for dentists, I kid you not!)… or x,xxx other cryptos that have zero practical use and will never amount to anything beyond pump and dump assets. Or real estate in awful locations, junk bonds issues by countries I wouldn’t trust with lunch money and so on.

Yet many people still invest.

Why?

Well, some do it because they’re delusional. Plain and simple. They drank the kool aid and that’s just what it is.

Others, however, are rational actors. They know they’re buying overpriced junk but don’t care. Why don’t they care? In many cases, because they believe the greater fool theory will work in their favor. To put it differently, they tell themselves that yes, they’re being fools by purchasing low-quality and/or grossly overpriced assets but at the same time, they’re convinced a greater fool will come along and take those assets off their hands… at a good price!

Many people ask me if this theory is actually “true” and, frankly, the best answer I can give them is that… well, it depends.

It primarily depends on how exactly they measure whether or not a theory works. If the only metric they care about is whether or not you can make money, then the answer is a resounding YES. You can most definitely make a ton of money as a result of the greater fool theory if timing and/or luck are in your favor.

If you care about sustainability, however, things get quite a bit tricky and I’d say that if you live by the greater fool theory, you might just die by the greater food theory. Think of it as one of those situations in which you might think you’re being a predator but are actually on the opposite end of the food chain. Or you can consider it a game of musical chairs with a distinct possibility of it being you that ends up standing while everyone else found a seat.

Few things are set in stone in the world of investing.

Fortunes have been made *thanks to* the greater fool theory, fortunes have been lost *because of* it. I guess one could consider it a matter of perspective. If you ask someone who has done well, survivorship bias kicks in and everything might seem peachy. If you ask someone who lost, you’ll probably get a strikingly different answer.

A “Wild West” speculator will tell you the only thing that matters is whether or not you’re in the green in the long run. If you are, continue doing what you’re doing. If you’re not, it’s back to the drawing board.

Someone who prefers erring on the side of sustainability, however, will be more skeptical. Perhaps that person will recommend an approach that’s more value-oriented (Warren Buffett-ish, for lack of a better term), maybe he or she will also refer to potential moral implications of the greater fool theory.

The bottom line is this: I’m not here to judge. While I love the idea of sustainability personally, I’m certainly not here to cast judgement on this or that. The only thing I’ll tell you is this: whichever business model you do end up choosing, make sure you understand exactly what you’re getting yourself into.

As long as you keep things rational and realistic, then even if you make bad decisions every now and then, you’ll be able to adjust course and move toward a better path… even if you do it the hard way every once in a while. This much is certain: there’s no room in the investing world for people who cannot measure risk properly.

The same principle is valid when it comes to domaining.

Whether you seek the comfort of stellar one-word dot coms or choose to dabble in more speculative “high risk – high reward” areas of domaining, it’s all good as long as your money/risk management game is strong. People have built fortunes in this industry with a wide range of business models: type-in traffic (especially back in the day), quality vs. quantity, quantity vs. quality, (specific) niche domination, outreach and so on.

The one thing they tend to have in common is that they’re good at risk assessment. Analyze successful investors across many other asset class and you cannot help but identify this common denominator. As such, let that be the theme of this blog post: risk assessment, risk assessment, risk assessment!

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