The importance of Grisham’s law
Grisham’s law states that bad money pushes out good money. What in hell does this mean? In a bull market, greed is all prevalent & logic, common sense and rationality are hard to find. People are buying what is worth Rs 10 for Rs 20 thinking that there will come a bigger fool who will buy these already overvalued assets for even higher price. For some time, this does happen as the asset prices reach bubble level ( US & other global mkt. housing market’s phenomenal rise ). People who make their investment decision based on what an asset is worth find that the prices have risen to an irrational level. Hence they sell out. This is the good money ( why good money? because these investors will again invest when the bubble bursts, ASSETT PRICES FALL TO REALISTIC / UNDER VALUE LEVELS) and hence help stabilize the fall in asset prices). And hence the bad money ( why bad money? Because they further take the asset prices to even higher irrational levels and any small investor who now buys, loses his shirt when the asset prices collapse on bursting of bubble- I.T collapse in 2000) of irrational investors drives out the good money.
Grisham’s law states that bad money pushes out good money. What in hell does this mean? In a bull market, greed is all prevalent & logic, common sense and rationality are hard to find. People are buying what is worth Rs 10 for Rs 20 thinking that there will come a bigger fool who will buy these already overvalued assets for even higher price. For some time, this does happen as the asset prices reach bubble level ( US & other global mkt. housing market’s phenomenal rise ). People who make their investment decision based on what an asset is worth find that the prices have risen to an irrational level. Hence they sell out. This is the good money ( why good money? because these investors will again invest when the bubble bursts, ASSETT PRICES FALL TO REALISTIC / UNDER VALUE LEVELS) and hence help stabilize the fall in asset prices). And hence the bad money ( why bad money? Because they further take the asset prices to even higher irrational levels and any small investor who now buys, loses his shirt when the asset prices collapse on bursting of bubble- I.T collapse in 2000) of irrational investors drives out the good money.
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