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Zimbabwe Stock Exchange – when will the music stop?

As an advisor at a respectable brokerage firm succinctly put it “How do you give advice to your clients without looking conflicted: when your fundamentals are suggesting a value of 100 cents but the market is still buying at 180 cents.”

At a retail level, a local money manager had these few pointed words about what characterises this stage of the bubble – “when your mother calls advising you to buy shares because her friends’ children are doubling their money overnight.”

To confirm, calls by Diaspora friends sounding off the idea of putting together some hard currency, trading for RTGS at premium and buying raging growth shares have all become too common today.

Recently a local advisory firm made the insightful observation that in the last weeks of August, share prices were going up rapidly without corresponding volumes – suggesting a dearth in liquidity.

But the lack of liquidity is not two way. Liquidity is dry for buyers and galore for sellers.

Simply, buyers are queuing for shares that sellers are not willing to give up – hence demand has been driving prices up with very few shares changing hands.

But when the market self-corrects, suddenly everyone turns from being a buyer to a seller and liquidity for sellers evaporates as prices slide.

Holders are locked in until buyers come to party – often at rock bottom prices.

At that moment it is advisable to be the choosy buyer and not the desperate seller.

Therefore, one should think about who else is holding assets they are buying.

You don’t want to buy assets at the same time speculators are buying.

Investors with the same motives often act in unison leading to sharp price movements.

Today, stock trades in the last four months have for the most part been driven by short-term holders or simply speculators driven by other factors other than fundamentals or need to fulfil portfolio allocation goals.

These are traders who will dump the assets at the faintest sign of a market decline.

We may not know when and how things will pan out. Not even the policy maker knows.

However, as Mark Twain puts, “history may not repeat itself but it often rhymes”.

To the extent that cycles are predicted to continue, investors can be assured that the current bubble is going to burst.

We cannot tell when the correction will occur, but at least we can get a sense of where we are in the cycle.

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