Greater Fool Theory in Australia: Risks for Investors in 2025

Australians love a property boom, a surging tech stock, or the promise of overnight riches from the latest speculative trend. But beneath every investment frenzy lurks a sobering reality: not everyone can win. Enter the Greater Fool Theory—a concept that’s never far from the headlines whenever markets heat up. In 2025, as new asset classes and surging prices tempt investors, understanding this theory is more important than ever for anyone keen to avoid being left holding the bag.

What Is the Greater Fool Theory?

The Greater Fool Theory suggests that it’s possible to profit from buying overpriced assets—so long as there’s someone else (the “greater fool”) willing to pay even more later. It’s the psychological engine behind speculative bubbles, from the Dutch tulip mania to the latest meme coin. The cycle continues until, inevitably, the pool of “greater fools” dries up, and prices collapse. The last buyers are left nursing losses as the music stops.

In practice, this means:

• Investors buy assets based on the belief they can sell to someone else at a higher price, regardless of the asset’s underlying value.

• Bubbles inflate as more people pile in, driven by fear of missing out (FOMO) and herd mentality.

• The collapse leaves latecomers exposed, often wiping out years of savings or investments.

Real-World Examples: From ASX Penny Stocks to Property FOMO

Australia isn’t immune to the Greater Fool cycle. The 2021–2022 speculative rush into buy-now-pay-later stocks like Afterpay and Zip was classic Greater Fool Theory in action. Valuations soared far beyond fundamentals, only to tumble as reality—and interest rates—caught up. Some investors who bought near the top are still waiting for a recovery.

It’s not just stocks. The property market regularly sees pockets of speculative fever, especially in regional towns or “hot” suburbs hyped by social media and investment seminars. In late 2024, several Queensland mining towns saw property prices spike as investors chased quick gains, only for values to slide when demand faded. Those who bought in at the peak are now struggling to sell, exemplifying the risks of following the crowd rather than the data.

2025 Trends: Where Greater Fool Theory Is Lurking Now

With inflation stabilising and the RBA expected to hold rates steady through much of 2025, risk appetite is creeping back into the Aussie market. New asset classes—think fractional property investing platforms, niche ETFs, and crypto tokens tied to AI projects—are drawing headlines and speculative cash. But the warning signs are familiar:

• Sky-high valuations: Some small-cap tech and green energy stocks are trading at eye-watering multiples, outpacing their earnings growth by a wide margin.

• FOMO-driven buying: Social media “finfluencers” are fuelling hype, encouraging retail investors to jump in before they miss the next big thing.

• Low due diligence: Many new investors are buying on sentiment rather than fundamentals, assuming there will always be a buyer down the line.

ASIC and the ASX have both issued warnings in 2025 about speculative bubbles in certain sectors, urging Australians to be wary of chasing returns without understanding the underlying risks.

How to Protect Yourself from Being the “Greatest Fool”

So how can you avoid falling into the Greater Fool trap?

• Research before you invest: Look beyond the hype. Check company earnings, debt levels, and sector outlooks before buying.

• Watch for warning signs: Rapid price spikes, media frenzy, and lots of “get in quick” messaging are all red flags.

• Stick to your plan: Investing based on a solid strategy—like diversification and long-term growth—beats speculation every time.

• Remember liquidity risk: If everyone tries to sell at once, you may not find a buyer. Don’t assume you can always exit easily.

The best defence is a cool head and a healthy dose of scepticism. If an asset’s value relies on finding a “greater fool,” it’s worth asking: what happens when the fools run out?