For the country’s investing population, the last decade has been one of fundamental change. Even though in ten years a great deal can be expected to change, the period of 2001 to 2010 has seen a fundamental transformation. The clue to this is not what has actually happened over the past decade, but what has not happened, and that is scandals.
Paradoxically, the most encouraging sign has not been the way the stock markets have risen, but the manner in which they have crashed. Till 2001, every major market boom ended in a sudden crash and that crash had its roots in a scam. Or rather, the boom was a scam and the crash happened when the scam was discovered or when it could no longer be hidden.
This was true of the Harshad Mehta boom that ended violently in 1992, the IPO boom of the mid-90s as well as the tech mania of late 90s. Each was the side effect of economic liberalisation that started in 1991. Basically, the economic freedom had arrived, but it was lop-sided and neither an adequate regulatory framework, nor the maturity in the investing public was there.
The 2000s were fundamentally different on both counts. There was a huge stock market boom that lasted for a big part of the decade from 2003 to 2008. It then turned into a terrible crash. However, both were different from the 1990s. There were no systemic failures. The boom was not discovered to be the result of money purloined from the banking system. Whether stock prices rose or fell, when an investor sold his holdings, he got paid. The stock markets grew bigger, became electronic instead of physical and the quality and speed of information improved, manifold.
This maturity and stability that the investment environment has gained is actually the biggest gain of the decade gone by. Till 1990s, equity investing was like playing a game in which the rules were unknown and the umpire himself was your opponent. This means for an ordinary Indian, who should benefit from equity investment, the real story starts now. 1990s and 2000s were just setting the scene, it’s this decade when you can leverage the country’s economic development. Whether it’s by investing directly in equities, or through mutual funds, or (hopefully) through innovations like the New Pension System (NPS), a larger number should now be able to gain from equity investing.
However, it is entirely possible that the coming decade may not match up to the returns generated during the 2000s. Roughly, equity markets have gone up four times in the past ten years. Can they rack up another scorching decade and make that 16 times in twenty years? The basic concept of reverting to the mean says they won’t. But I’d hate to rule it out.
This column first appeared in The Economic Times on January 3, 2011