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Lessons from the crash

Niraj Bhatt

The Sensex has shaved off all its Y2K gains and is back to its December 1999 levels after the bloodbath on Black Tuesday. From its high of 6150 points on February 14, 2000, the Sensex has lost 20 per cent. While this may not seem like much of a fall, the impact has been telling. Most retail investors were heavily invested in tech stocks, and they bought when prices were very high. So the pain is deadly serious.

The gloom is all-pervasive. Walk into any retail broker's office and all one sees are wounded investors. It is very safe to assume that most of them have taken a beating. Margin calls (paying the difference between cost and current price if stock price falls when the shares are bought in carry-forward) are already hounding investors and operators.

However, there does seem to be a silver lining. Most market players say that this crash has enriched their 'investing experience' and they have learnt a few lessons from the bloodbath. Here are ten lessons that investors should keep in mind:

Lesson #10: Things can go wrong

In the mindless bullishness, investors forgot the law of gravity. Stocks don't always go up and markets move in cycles with crests and troughs.

Lesson # 9: It's impossible to make supernormal returns all the time

Everybody thought it was a cinch to double money in a month in tech stocks and the B group stocks in February. All those stocks are below cost now.

Lesson # 8: There are no greater fools

The Greater Fool Theory is buying a stock to sell it at a higher price to a greater fool. When the chain breaks, the last fool is stuck with the shares.

Lesson #7: The last bet may kill you

As traders make money, their confidence increases and the next position becomes larger. When the market falls, the size of the loss gets bigger as the bet itself was high.

Lesson # 6: Manufacturing companies also make money

In the crazy bullishness for tech stocks, investors had forgotten that manufacturing companies do provide reasonable returns.

Lesson # 5: Leverage is always risky

There will be enough cases of speculators betting the house and losing it in this crash. Relatively prudent investors have borrowed against their shares or punt in badla. But when the margin calls come, everybody is in trouble to pay up the rest of the money.

Lesson #4: Dharavi is dangerous

The lesser stocks of the BSE in the B2 group (called "Dharavi" from a particular corner of the erstwhile trading ring where such stocks were traded) are dangerous. They fall as rapidly as they rise.

Lesson #3: Booking profits is healthy

As you make money, it may be prudent to take money out of the market partially.

Lesson #2: The small investor is "still" always wrong

The small investor has been the sucker in the Indian stock market for a decade. He is in the party for the shortest time and every time he enters the market with confidence, the music stops. If you thought this time was going to be different, you couldn't have been more wrong.

Lesson #1: In the end, you are alone

Following anybody, even Ketan Parekh, doesn't work all the time. Make your investment decisions wisely; it's your money finally.

Stocks

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