When The Tide Went Out: 2001
The year 2001 brought the first big confirmation that India was properly mixed in with global financial markets. The NIFTY index fell 16% that year, while the S&P 500 fell 11%. The fact that India’s information technology (IT) companies were exporting most of their services to the West hastened the process that had begun in 1991 with financial reforms under the Rao government.
Of course, the Mumbai market had its local profit-takers and rabble-rousers who rode the IT bubble to the top, some getting out in time and some getting crushed. There were numerous individual scrips that were bid up to maniacal levels, some fraudulently, as later found by the Securities and Exchange Board of India, and some merely based on the delusions of crowds.
Unfortunately, the various fraudulent manipulations of prices appear to have been done with the complicity of promoters (controlling shareholders in most cases) of the various listed companies. Many of these bid-up stocks had weak balance sheets and suspect business models backing them. The problem, as is usually the case in such matters, was that the neighbours were making a killing in the market and you were being left out. Newspaper reports from 2000 describe middle-class punters chasing their stock brokers with fistfuls of cash hoping to grab a piece of the action. Pension accounts were being liquidated to fund greedy dreams. These were classic bubble stories destined for unhappy endings.
Just like in the 1992 crash, the long-term investor who held on to his conservative investments through this debacle had come out unscathed on the other side. Even the NIFTY, which was not immune to the froth, came out positive over the two year period shown in the graph above.
Next, we will look at 2008 – the ultimate test for the buy and hold investor.