How to play the big boys at their own game, using small boys

Everyone in Dubai appears to be having a punt on the stock market, doing minimal research for maximum gain For those of us trying to make a living trying to outsmart markets, the efficient markets theory is hard to disprove. Markets outperform collections of so-called experts because they reflect the pooled wisdom of large groups of people. Nowhere is this truer than in the GCC region’s markets and the Dubai Financial Market (DFM) in particular.

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By  Stephen Corley Published  November 27, 2005

|~||~||~|Everyone in Dubai appears to be having a punt on the stock market, doing minimal research for maximum gain For those of us trying to make a living trying to outsmart markets, the efficient markets theory is hard to disprove. Markets outperform collections of so-called experts because they reflect the pooled wisdom of large groups of people. Nowhere is this truer than in the GCC region’s markets and the Dubai Financial Market (DFM) in particular. Despite the assembled economists, analysts, fund managers and doomsayers, the collective wisdom of the punters, err sorry, investors proves impossible to naysay so far. The latest entrance category to the get rich quick club seems to be the fairer sex. They now join the ranks of retired shawarma stall owners, car salesmen and general wannabes in the seething pit of the DFM. One of our brave new daily newspapers interviewed a batch fresh from their deep analysis of the market, and presumably moist with excitement from recent trading successes. “I used to work occasionally full time,” says one, adding: “ but now for only a few hours each day with Dhs100k investment I can make at least Dhs7000 a month.” Brilliant! That’s nearly US$2000 a month, for a bit of guesswork! Or if you prefer, 100% per annum. But guess what: strangely, there have been no job offers in sight from the investment banks. Another comments: “ I didn’t plunge in but read books for two months and now consider myself an expert.” Of course you are, dear, and why not? In the latest landscape, why let rational analysis and value methodology get in the way of old-fashioned self-belief? We seem to have leapt into an area where tarot might be a better alternative than a copy of Warren Buffett’s latest advice. The world’s greatest investor has an impressive track record, but the DFM lot seem to be doing even better. Even revered local columnists have given up forecasting, likening the skills required to be more in line with astrology than numeracy and accepted that the thing is out of control and may well career upwards for a while yet. And that’s the beauty of the liquidity/weight of money theory, the money has to go somewhere so don’t acknowledge the realists, just bet away. However, as the outgoing Fed chairman likes to say, a sign of irrational exuberance in an asset class is when people refuse to acknowledge a contrarian view to what they believe. Am I the only one who simply doesn’t subscribe to the “buy now while stocks last” scenario punted by the brokers and bankers? I was at the stock exchange this morning watching the new game in town. Curiously in a country where gambling is illegal, trading the stock market, an arena which defies any normal valuation method, appears to have reached a cross between Las Vegas and the Klondike. The DFM constitutes less than 50 securities including debt instruments and mutual funds and has racked up triple digit gains this year alone, capitalising the overall market at over US$112 billion. At heady valuations mimicking and frequently exceeding those in the Japanese asset spiral of the late 1980s, this is a game where the odds would seem stacked against those currently playing the greater fool theory to destruction. Where else can brokers recommend a bank at six times book value as a snip? Unfortunately there is no house winner in this case or at least if there is it’s the big boys who got out a while back. A bubble, according to the OED, is something lacking substance, stability or seriousness, an unreliable scheme or enterprise, to overflow with excitement. So, when the price to book value ratios in GCC blue chips are anywhere between eight and 20 and P/E ratios in the UAE are obscenely expensive at over 30 times earnings, when the top companies are more overvalued than the Nikkei at the height of the Japanese asset spiral in the late 1980s, I say it’s a bubble. And yet the DFM is sucking in new investors at a rate of more than 3000 a week with an estimated 180,000 nationals active in the market already. History teaches us that men and nations behave wisely once they have exhausted all other alternatives. We urgently need to develop some common sense before it’s too late. Stephen Corley is a business consultant with experience in fund and asset management. ||**||

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