Many companies on the Dubai Financial Market are now trading at less than book value.
Finance is human nature in action
Finance is human nature in action. That is the view of Christopher Fildes, a legendary observer of the City of London. He began his journalistic career when the city was still a bowler-hatted gentleman's club and he is close to ending it with the financial world in meltdown. He was one of the few observers who didn't fall for the snake-oil salesman charm of investment bankers, selling financial instruments they didn't understand. But how the mood has changed: a year ago everyone was greedy, looking for outrageous rates of return. Now investors are panicked, scared of losing their shirts.
I was observing human nature in action about a month ago as I stood at the top of the ziggurat at the Atlantis Hotel in Dubai and watched people descending the "Leap of Faith" waterslide. It is said to be like falling almost vertically out of a nine-storey building. This is not something I have ever entertained doing, but it is quite amusing to stand and watch people drop faster than the Dow Jones on Meltdown Monday.
I thought about taking the leap myself. What could go wrong? I considered the words of Franklin D Roosevelt when trying to inspire consumer confidence and drag America out of the Great Depression: "The only thing we have to fear is fear itself". However, the thing about fear is that it is scary. While I could see people going down the slide and coming out unscathed at the other side, how was I to know that I would be OK? It looked terrifying. This is how many stock market investors must feel. However low the markets finish at the end of a week, they end up going lower the week after. It makes no sense; all valuations have been abandoned, the chartists have thrown in their protractors and slide rules.
Warren Buffet, the so-called "Sage of Omaha", called the bottom of the US market some weeks ago, and bought into Goldman Sachs. His investment is worth many millions of dollars less today. He has also written down some US$35 billion (Dh128.5bn) of put options, having apparently bet that the Dow Jones would finish higher over the next few years. Luckily for him he has a decent financial stockpile so should be able to ride out the recession in some comfort.
Others are less fortunate. Poor Dick Fuld, the former head of Lehman Brothers. At one point he was a paper billionaire. But when Lehman collapsed, his holdings became worthless. He has subsequently had to persuade his wife to sell her collection of paintings just to maintain a decent standard of living. The other evening I met a group of charming Pakistanis, many of whom had been attracted by the potential of the Abu Dhabi and Dubai stock markets in the past couple of years, and made good returns - until now. "It doesn't seem fair," one lady told me. "The markets used to go up. Now they just go down." Many companies on the Dubai Financial Market are now trading at less than book value. Among others, Emaar, the country's biggest property developer, is trading at about half its price-to-book ratio. This means that Emaar could stop all its operations, sell all its assets, and give investors a return of 50 per cent.
Added to which the dirham is pegged to the dollar, which means that in a time of financial uncertainty, you will be repaid in the world's reserve currency. Apart from the yen, against which it has declined, the dollar has strengthened against just about every other currency. By just about every criteria, this is a screaming buy. So why are the shares slumped to about Dh2.98 - down from a high of Dh15.7 this year? Those lucky enough not to have any shares or investments might wonder what all the fuss is about. Does it matter if a stock market plunges? Can it ever go down to zero? There is only one recorded experience of such an event. It was in St Petersburg in 1917, and we all know what happened next.
I suggested to my wife that perhaps we should try the slide. "Do you want to go first or second?" I asked. She said she would go first. So we walked back up the five flights of stairs and stood in the queue. The woman in front of my wife was prevaricating, quite naturally in my opinion. There was a very nice young Kenyan guy who told her it was a leap of faith. "Just believe," he said, "and you will be fine." To my surprise she walked to the slide, lay down, and disappeared. She didn't even scream as she descended. This, I thought, is how it must be to go into a tomb. I considered following her, but then I thought: what if she didn't make it? Could I leave our children parentless? That would be thoughtless; almost reckless.
The Dubai and Abu Dhabi markets are now closed until Dec 11. Investors will be able to have a long hard think about whether they want to keep investing, or perhaps find another use for their money. I can't talk for investors, but my experience at the top of the stairs, looking down the slide, was that the longer I waited, the less inclined I was to go down it. I lacked the faith to make a leap of faith.Instead, I took the walk of shame back down the stairs. I found my wife waiting for me in the pool at the bottom.
"Are you all right?" I asked. "Yes. What happened to you?" "Nothing," I said. "And that's how I like it." firstname.lastname@example.org