It’s (not) different this time too | Value Research There’s no telling whether the equity markets’ problems will be deep or long or both, but they’ll surely be something investors have already seen
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It's (not) different this time too

There's no telling whether the equity markets' problems will be deep or long or both, but they'll surely be something investors have already seen

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The equity markets are crashing. Don't worry, it's an honest crash. What's an honest crash, you might ask? To understand that, you must appreciate what a dishonest crash is. Till the end of the 1990s, all the significant declines in India's equity markets happened because of the discovery of some scam or the other.

Or rather, the boom was a scam and the crash happened when the scam was discovered or when it could no longer be kept 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 the late 90s. Each of these was a side effect of the 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 equity crashes that have happened since then are different. There are real and understandable reasons why the crash is happening - the primary culprit being the enormous inflation in the US, with supporting roles being played by COVID and the war. Of course, these reasons are deeply worrying for investors. Their effect could last for years. There have been periods in most markets where a decade or more went by and the indexes did not go anywhere. In India, the period from just after the Harshad Mehta crash to 2002 was one such. The markets made brief excursions upwards but the Sensex was at about 2200 in mid-1993 and 3200 in early 2003, which in the context of an equity market is stagnation. The US, along with most western markets had a similar phase during the 1970s.

I must point out that I don't really think that the word crash is (yet) a suitable description for what is happening, at least in the Indian equity markets. Even at this point - June 13, 2022 - when I'm writing this, the Sensex is positive in one year, the Nifty is negative in decimal points and the small and mid-cap indexes are barely negative. A look at equity mutual funds is even more instructive. If you go to Value Research Online and pull up the listing for all diversified equity funds (regardless of capitalisation), then out of 328 that are listed, 264 have positive one-year returns!

By the standards of any of the past crashes that I have talked about, this is nothing, just a small blip. I'm not saying it can't get worse, but I believe the panic is being overdone for now. Of course there are genuine reasons to be apprehensive, as I have said above. There are psychological reasons too - the sudden impact of the Chinese virus and the war in Europe have made many people a little bit shell-shocked and generally apprehensive of the future. That's surely playing some role. The strange problem of Bitcoin and other cryptos, which is a novel phenomena, is also having an unpredictable negative effect.

However, it's now been three decades since the 'modern' Indian economy and equity markets got going properly and if there's anything to learn from it, it's only this. It's true that the times are volatile and there is great uncertainty and fear in all financial markets of the world. However, anyone who has personally experienced three or four previous periods of great uncertainty in the Indian equity markets, will instinctively refuse to believe that the fundamentals of investing have changed since 2008. 'This time it's different' has never sounded more false than it ever did before.

All experienced investors have witnessed that the foundations of great investing fortunes are laid in bad times. It's precisely when times are bad that one must invest fearlessly but sensibly so that when good times return, the money is just lying there for you to pick up. That's exactly what happened in the past as the crisis ebbed away and economies revived.

Suggested read:

In uncertain times, focus on the certainties

How to deal with the stock crash?

What would the old man do?


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