Has AI Killed Sensible Investing? (Urban Company Case Study) 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

Well, I have to admit that I was wrong.

Just days ago, I argued that the IPO of Urban Company carried a staggering price-to-earnings (PE) ratio of 520x when based on its operational profits.

Please note that the operative word here is 'operational profits'.

Several reports claimed that the IPO was priced at a PE of around 60x.

But this was including a massive one-time tax benefit.

If you exclude the benefit and consider only the real earnings of the company, then the PE ratio came to a huge 520x. That's true. Based on its real current earnings, the PE ratio of Urban Company was more than 500x at the time of listing.

Urban Company's stock market debut wasn't just successful; it was a spectacular explosion that destroyed my expectations.

As I write this, the stock has skyrocketed an astonishing 80% above its upper price band.

Yes, that's correct. The stock has gone up 80% from its IPO price and this has taken the PE ratio to an even more staggering 936x.

Let that number sink in. 936 times its latest operating earnings.

That is like buying a company that's generating a profit of Rs 1 crore for Rs 1,000 crores. Imaging paying nearly a thousand years' worth of a company's current profits upfront.

For a business that has historically struggled to achieve consistent profitability, this isn't just optimism; it is counting on a future that may never come.

I'm struggling to find a single historical example where paying 900 times earnings led to substantial returns for investors 3-4 years down the line. If you believe Urban Company will be the first, I sincerely wish you the best of luck.

To be honest, the line between rationality and irrationality is not always clear. What appears to be a rational valuation to one investor may appear to be entirely irrational to another.

However, there are times when it is quite evident that a stock is being valued irrationally. And paying a PE multiple of more than 900x for any company let alone Urban Company does qualify as being irrational in my view.

This brings me to a very important question. A lot of famous investors are saying that technological advancements like the internet and now, Artificial Intelligence i.e. AI have made the markets more rational and efficient.

In fact, the markets have become so efficient that it is getting increasingly difficult to outperform the benchmark index. Even the smartest fund managers with unlimited resources at their disposal are struggling to beat the index on a consistent basis.

Allow me to explain this with an example.

Historically, investors could outperform by finding statistically cheap companies, like low PE stocks, low price to book value stocks etc.

This required a significant analytical edge gained through tedious, manual research that others wouldn't do. The internet demolished this by making financial data universally available, allowing anyone to run simple screens.

Now, AI and quantitative funds have systematically dismantled this edge entirely.

Powerful algorithms can scan global markets in milliseconds to identify any pricing anomaly.

They perform deep analysis instantly, assessing the true risk and value far beyond basic metrics. This automated activity arbitrages away any mispricing almost immediately.

The return one could earn from this type of number-crunching analysis has drastically diminished.

The window of opportunity that once lasted for years now closes in seconds. Therefore, the analytical edge of finding cheap stocks through data screening is now a commodity, effectively eliminating it as a reliable path to market-beating returns.

Now, isn't this confusing. On the one hand, by giving examples like Urban Company, I am saying that markets are still irrational. And on the other hand, I am also saying that markets have become more rational and efficient after the arrival of the internet and now, Artificial Intelligence.

So, what is it? Are markets irrational or rational and how does this affect the way we should invest?

Well, markets are efficient, but they are not efficient most of the time and across all the stocks.

Let me repeat that. There is a difference between markets being 'frequently' efficient and markets being 'always' efficient.

Let me put it another way.

A group is smart only if everyone in it is doing their own thinking. The moment people stop thinking for themselves and just follow the group, smart decision-making turns into a reckless mob.

When each person independently researches, analyzes, and comes to their own conclusion, the group benefits from all of these different perspectives. The collective decision becomes wise because it's built on a foundation of diverse, independent thought.

The problem starts when individuals get lazy or uncertain. Instead of thinking for themselves, they look around and think, "Everyone else must be right." They outsource their thinking to the herd. This creates an echo chamber where a single idea, right or wrong, gets amplified with no critical challenge.

This is how rational groups turn irrational. It's no longer about facts or logic; it's about emotion and momentum. It's like a stampede-the direction of the crowd isn't based on a smart plan, but on a blind, contagious panic or excitement.

This is when market efficiency-the very thing AI is supposed to enhance-spectacularly breaks down.

We don't need to look far for examples: the Dot-Com bubble, the Housing Crisis of 2008, and the meme-stock frenzy of 2021 were all episodes where analytical tools were available yet were utterly ignored in a collective fever dream.

This is where the modern investor's edge lies.

It's no longer about seeing the data first; it's about having the temperament to interpret it wisely when everyone else is losing their heads.

It's the discipline to refuse to pay more than 900x earnings for any company, no matter how compelling the narrative.

It's the courage to steer clear of "story stocks" - businesses with weak fundamentals whose only asset is a promised, rosy future - much like a sailor avoiding sirens whose songs promise treasure but lead only to shipwreck.

Yes, the rise of AI has made outperforming through analysis alone more challenging than ever. But it has not, and cannot, change human nature.

Extreme market swings aren't a thing of the past; they are a part of human psychology. Market bubbles and crashes keep happening because of human nature.

Therefore, the timeless wisdom of Warren Buffett remains your most potent strategy: "Be fearful when others are greedy, and greedy when others are fearful."

In a world of perfect analytical machines, the ultimate edge is, and always will be, a rational and disciplined mind.

While the crowd is busy using AI to calculate how high a stock can go, your job is to use your judgment to decide when the price no longer makes sense.

That's your best chance at earning market beating returns.

What do you think? Has technology made markets more efficient or have the episodes of irrationality gone up? Let me know in the comments section.

Well, that's all from me today. I will see you again next time. Goodbye and happy investing.