A few lessons from the crash

The stock markets have crashed big time. I dont think we have ever seen such dramatic collapses in the Indian markets. This is highlighted by the worst ever weekly performance ending this week. And the week had only 4 trading days!

But first, let me apologise for what I am going to say next. I almost am tempted to say, "I told you so". Readers would have noticed the very cautious slant in my previous blogs and mails since March of this year. Of course, I never dreamt of such intensity, but I had sounded caution. So an apology is in order if I sound self-congratulatory here.

But what lessons can we, as investors, derive out of the current crisis? While there are many and I would like to highlight a few ones.

(1). The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings.
(William Shakespeare - Julius Caesar I.ii.)
No one has the ability to totally comprehend our economic world. The world is far too complex and has unimaginable linkages for us to get an idea of how one parameter would change what others and by how much. What started as a country specific (USA) problem in one sector of the economy (housing) has now become a world wide credit crisis that threatens to undermine the entire financial system of the world. First it was housing prices, then investment banks, then mortgage lenders to commercial banks to now trade financing (the latest is on letters of credit or LCs). All assets are getting decimated, stocks, commodities, real estate...except the US dollar and precious metals like Gold. Seemingly insulated countries like India are witnessing high linkages via capital flows.

The lesson to draw is that unexpected things do happen in the world, things that so beyond the ordinary that they change the future. While no one can really predict what and how intense such changes would be, it a wise idea to be aware that they can happen and more importantly, be prepared to protect your wealth or create wealth for yourself when such events occur.

The typical market expert has a standard advise. Hold stocks for the long run, or use a SIP to invest, etc. Such advise of ok in normal times. In extraordinary times, such advise causes a lot of pain and hardship. Investors should learn how to avoid such large losses when unprecedented events occur. Avoiding large losses in bad times is good both for our financial and physical health.

(2.) Common sense is not so common afterall.
After 5 years (2003-2007) of a boom, people started taking things for granted: that India will keep growing at 9% for the next 50 years, that capital will keep flowing in forever because our country is so great, that stocks will keep returning 25% per annum ad infinitum. Guess what? Trees dont grow to the skies. In the big boom, the GDP expanded at higher than historic rates, EPS bases became bigger. Inflation set in and interest rates rose higher. Common sense mandated that the future would not be anything like the past. Common sense mandated that growth will slow down and earnings growth will slow down. But who cares for acquiring common sense when dreams and hopes abound? And when past experience suggested that good times would stay forever. The person who acted with common sense would have been able to protect his/her wealth better than the others, including many experts who are not feeling all that rich anymore.

(3). The lesson we learn from history is that we learn nothing.
How many of us have seen past debacles? At least we have heard about them or read about them, if not experienced them. Be it the bull market in 1985 (VP Singh cut direct taxes), Harshad Mehta time in 1992, FII driven optimism (1994) or the technology bubble in 2000, large rises over short periods are unsustainable. In each bust, stock markets fell 50% or more. That is the very nature of capitalism. Sudden booms bring in their own problems which invariably lead to a reverse cycle. But in each boom we feel it is different. There are always very plausible and logical sounding reasons for why it is different each time. In reality, it never is different. Capitalism makes super-normal returns disappear in no time. To think otherwise is a folly.

While we can never exactly say when the cycle will reverse, we can say with confidence that it will. While I do believe that the Indian stock markets are in a secular bull phase, cyclical downturns are to be expected (unless there is a systemic collapse, in which case all bets are off) and one should be prepared for such.

So, in closing I would like to state a few things:
-Seek competant advise, not the advise that is dished out to the masses. If every expert gives the same advise, how many among them would truly be competant?
-Learn to sell. Selling is the key to outperformance
-Get real. Expect the unexpected and have a plan to deal with it if the unexpected comes about. Do not live in denial
-Above all, have a plan. Period! Much pain comes because people do not have an investing plan, but rather invest haphazardly.

Happy investing!