Cruel of the person that issues parking tickets outside the PSX Lahore office to comment on the KSE100’s epic bull run – “see how it’s rising two thousand points a day?” – just when I was wondering if the market was in a bubble.
Imagine the odds.
Because it got my mind racing to George Soros’s famous rationale for contrarian investing philosophy. When everyone “even the taxi driver” is recommending buying is exactly when you should sell. It may signal a top – a classic sign of herd behaviour and a speculative bubble.
Other heavyweights have weighed in on contrarian thinking also. In Warren Buffet’s immortal words, for example, “be fearful when others are greedy and greedy when others are fearful”.
The idea aligns with the textbook principle that ‘euphoria’ defines the speculative stage of the bubble only to be followed by a ‘critical stage’ when insiders begin to cash out and then ‘revulsion’, which ends in tragedy for long positions that figured the bull run would never end.
This contrarian sentiment echoes Soros’s broader belief in ‘reflexivity’, where market participants' perceptions and actions can distort asset prices away from underlying fundamentals. By recognizing these distortions and being willing to act against the prevailing sentiment, he has successfully exploited such market inefficiencies.
The smart investor is a contrarian investor only near tops and bottoms, after all, because being contrary during steep bull and bear runs wouldn’t be very smart, would it?
Yet the chain of thought triggered by the ticket collector, George Soros and Warren Buffet begs the obvious question of whether the market is really in a phase where speculation is distorting asset prices away from fundamentals? Remember it’s no good to rely only on technical indicators at overbought/oversold levels because momentum oscillators can stay elevated and depressed for extended periods where irrational market behaviour causes the fat tails that bring long term investors their big profits. It is also why the market continues to defy clearly identifiable short-term candlestick reversal patterns (more on this subject in a separate blog post), as the KSE100 Index has done repeatedly over the past few days and weeks.
So it is to fundamental analysis that we must look for answers. And fundamentally, the market is still playing catch-up. Taking only the most fundamental of fundamental valuations as a start, the price to earnings ratio, suffices to show why the market is far from a distortion of asset prices to warrant a speculative bubble.
Currently at around 6, the market’s P/E ratio is still some way from the 10-year average of 7.5-8. That explains why market bulls are not deterred by headwinds, even when temporary – and very natural – profit-taking creates short-term reversal patterns.
Therefore it seems a safe bet for the ticket collector to advise anybody parking their car next to Al Hamra centre to go long and stay long the KSE100, especially with a number of interest rate cut sweeteners to follow – barring the unforeseen, of course!
Disclaimer: This content is for educational and informational purposes only. It should not be considered financial or investment advice. Always do your own research or consult with a licensed financial professional before making any investment decisions.
