Crashes are the best classroom

In the last 93 years of American stock market history, there have been 50 declines of 10 per cent or more. That is, on average, once every two years. Of those 50, fifteen were drops of 25 per cent or worse – a bear market arriving, by the historical clock, roughly once every six years. These numbers come from Peter Lynch, one of the greatest fund managers who ever lived, and he offered them not as a warning but as a reassurance. If you understand that declines are a permanent and predictable feature of markets, you stop treating each one as a catastrophe and start treating it as a calendar entry.

I thought of Lynch's arithmetic last week as I watched the Sensex shed around 8 per cent during March, touching 72,000 at its worst before recovering to around 75,000+ as I write this. Whether the index bounces to 77,000 or dips again to 73,000 before you read these words is, frankly, not the point. The point is what this episode is teaching you, or what it should be about yourself as an investor.

Here is something I have believed for a long time and will say plainly: no book, no column, no financial course, and certainly no YouTube video can give you what a real market crash gives you. The knowledge is experiential. You have to be inside it – watching your portfolio shrink, reading the breathless headlines, fielding anxious questions from family members, feeling the pull to do something, anything – to know what kind of investor you actually are. Theory is a fine preparation. Survival is the real examination.

I speak from personal experience, and not humbly. The three crashes that educated me most were the Harshad Mehta collapse in 1992, the dotcom bust of 2000-01, and the global financial crisis of 2008. Each one was terrifying in the moment, but each one was eventually irrelevant to the long-term story of anyone who stayed invested. I still remember the black humour that settled over the Value Research office in the depths of 2008. The joke doing the rounds then was of two traders talking. "I've given up on everything," says the first. "I'm only buying gold now." The second one thinks for a moment and replies: "What will you do with gold? I'm buying rice." 

That joke, and the nervous laughter it produced, captured something true about how those weeks felt – as though the normal rules of the world had been suspended indefinitely. But more than that, each crash taught me something I could not have learned any other way: that the noise at the bottom of a market fall is indistinguishable from genuine catastrophe, and that the only way to tell the difference is to hold on and watch. The investor who has sat through one serious crash arrives at the next with something invaluable – not prediction, but recognition. They have seen this film before. They know, in their bones rather than just in their heads, that it does not end the way the panicked voices say it will.

Lynch makes another point that is worth dwelling on. He talks about Walmart, which went public in 1970 with an already excellent track record. If you had bought the stock on the listing day, you would have made 500 times your money over the decades. But – and this is the part people miss. If you had waited ten years, worried about whether Walmart could expand beyond a handful of states, and bought it only then, you would still have made 35 times your money. The lesson is not that timing is easy. The lesson is that time is extraordinarily forgiving to those who don't panic. You had decades to get into Walmart and still win handsomely. What you could not afford was to sell during one of the 50 declines and never go back.

The current fall, whatever its eventual depth, is doing something useful. It is sorting investors into two groups: those experiencing genuine fear for the first time and those who have felt it before. The first group is getting their education right now, in real time, at real cost. Some will learn the right lesson, some will not. The ones who do – who sit on their hands, maybe even add to their SIPs, and wait for this particular episode to pass – will join the second group permanently.

And the second group sleeps rather better.

Also read: Perspective in a panic