The war and beyond

For the past 17 days, a significant and highly intense conflict has unfolded in the Middle East. This war is multifaceted, encompassing military strikes, counterattacks, intricate narratives, and propaganda from all sides. The aggressors in this war are the United States of America (U.S.) and the State of Israel, while the defender is the Islamic Republic of Iran. While the U.S. is a secular state, under President Donald Trump, there have been calls to promote a stronger Christian identity. Israel, as a Jewish state, and Iran, an Islamic state, have starkly different ideologies but share a long history of religious and political conflicts rooted in their common Abrahamic heritage.

The relationship between Israel, the U.S., and Iran has been contentious for decades. A key event in this ongoing tension was the 2025 military confrontation between Israel and Iran. On June 13, 2025, Israel bombed Iran’s military and nuclear sites, killing several military officers, scientists, and civilians. After 12 days of intense fighting, the U.S. mediated a ceasefire.

However, the current conflict cannot be reduced to religious differences, counter-terrorism, or self-defense. Instead, it appears to be part of a broader U.S. strategy to:

·         Control the global energy market and key trade routes,

·         Maintain geopolitical and economic supremacy over Russia and China, and

·         Prevent the rise of autonomous economic powers in the Middle East.

With Iraq’s military power decimated and Pakistan’s strategic assets severely weakened during Operation Sindoor, Iran remains the only truly independent and potent military power in the region. The ongoing Russia-Ukraine conflict has also highlighted Western Europe’s energy vulnerabilities, further underscoring the importance of controlling energy resources and strategic trade routes such as the Suez Canal, the Strait of Hormuz, and China’s Belt and Road Initiative (BRI). Achieving this would give the U.S. a decisive edge in global geopolitics.

Despite the theoretical strength of this strategy, its implementation has not been without complications. The first major setback came when coalition forces killed Iran’s Supreme Leader, Ayatollah Khamenei, on the first day of the conflict. This act, combined with the bombing of a school that killed 160 young girls, has galvanized Iran’s resolve and transformed the war into a religious struggle. The death of Khamenei has united the Iranian people under the banner of Islamic radicalism, while also making Arab support for the U.S.-Israel coalition increasingly uncertain. Meanwhile, the attack on the school has severely damaged international opinion, particularly in Europe, where anti-coalition sentiments are rising. Even President Trump faces mounting criticism domestically. Most NATO allies have so far refused to join the war despite repeated calls by President Trump.

The Current State of Affairs

As of now, the war shows no signs of de-escalating soon. While the intensity of attacks may subside as military resources dwindle, the broader conflict appears far from resolution. Additionally, several key trends are emerging:

·         Global Economic Crisis: The war threatens to spark a global economic crisis, driven by energy inflation and severe logistical bottlenecks reminiscent of the economic disruptions seen during the Covid-19 pandemic.

·         Middle Eastern Impact: Countries like Qatar, Bahrain, UAE, Kuwait, and Iraq, caught in the crossfire, are witnessing widespread infrastructure damage and suffering reputational harm as secure havens.

·         Israel’s Vulnerability: Israel, long considered militarily invincible, has reportedly sustained significant losses to both its infrastructure and military forces, leading to a reassessment of its invulnerability.

·         U.S. Economic and Security Costs: The U.S. has sustained considerable losses, both in terms of military assets and economic costs. The long-term implications could be far-reaching, with the U.S. facing higher security risks for years to come, as Islamic radical groups seek to avenge Khamenei’s death.

·         Iran’s Dilemma: Iran has lost many key leaders, faced substantial infrastructure damage, and alienated long-time allies like India and Pakistan. Meanwhile, the Iranian prince in exile has called for a popular uprising in Iran, hoping to restore his regime.

·         Russia and China’s Restraint: Surprisingly, both Russia and China have refrained from directly entering the conflict on Iran’s side, although there are reports suggesting they may be providing covert support through ammunition and technology.

Potential Endgames: How Will the Conflict End?

Admittedly, I do not possess even basic qualifications to forecast the outcome of this war. Nonetheless, like any aware citizen, I find it relevant to stay aware of the current situation and make an assessment of the likely outcomes based on my understanding of the various contemporary issues and readings.

In general, wars can end in four main ways:

1.    Aggressor Victory: The aggressor achieves its objectives, replaces the existing regime with a puppet government, and extracts reparations from the defeated enemy. A historical example would be the U.S. victory in Iraq.

2.    Defender Victory: The defender manages to repel the aggressor’s forces, captures or kills key military leaders, and emerges with a strengthened position. Examples include World War II and the 1971 Indo-Pakistani War.

3.    Truce: Both sides agree to a ceasefire, with the aggressor retreating and both parties finding a negotiated resolution. An example of this would be Operation Sindoor.

4.    Stalemate: Neither side wins, but the fighting continues at low intensity, with no formal end to the conflict. The Russia-Ukraine conflict serves as an example.

U.S.-Israel Alliance Victory (Aggressor Wins)

A U.S.-Israel victory could lead to the following outcomes:

·         Regime Change in Iran: Iran’s Islamic regime is overthrown, and a new, U.S.-friendly government is installed.

·         Enhanced U.S. Control over Arab States: The U.S. solidifies its influence in the region, ensuring strategic dominance over vital energy resources and trade routes.

·         Expansion of Israel’s Borders: Israel may continue its aggressive policies in Palestine, potentially annexing more territory and solidifying its position as a regional superpower.

·         Strengthened Economic Sanctions on Russia: With enhanced energy security in Europe, the U.S. could ramp up its sanctions on Russia.

·         Shift in U.S.-China Relations: The U.S. could gain an advantage over China, particularly in the economic and trade spheres.

·         Stabilized Energy Markets: As the conflict subsides, energy prices may stabilize, albeit at a higher baseline.

Iranian Victory (Defender Wins)

An Iranian victory could result in:

·         Revenge for Khamenei’s Death: Iran avenges the death of its leader by targeting top figures in Israel and the U.S.

·         Iran’s Rise as a Regional Power: Iran assumes a dominant role in the Middle East, uniting other Islamic nations and taking control of energy resources and trade routes.

·         Peace with Palestine: Israel may be forced to negotiate with Palestine, leading to a resolution of the longstanding conflict.

·         Empowered Radical Groups: Groups like Hamas, Hezbollah, and the Houthis could gain territorial control in key areas such as Palestine, Lebanon, Yemen, and Syria, destabilizing the region further.

·         U.S. Withdrawal from Iraq: The U.S. could lose its influence in Iraq and be forced to pull its military out of the region.

·         China’s Rising Influence: China may step in as the new protector of the region, offering military and economic support to rebuild Iran and other conflict-ravaged nations.

·         Surging Energy Prices: Iran’s control over energy routes could send oil prices skyrocketing, triggering a global economic crisis.

·         Ukraine yields to Russia’s demands: The NATO funding of Ukraine defense comes under pressure. Ukraine is forced to strike a deal and yielding control of some territories to Russia.

Truce (Mutually Agreed Ceasefire)

A truce could result in:

Restoration of the Status Quo: The parties agree to a ceasefire, and the conflict ends without significant territorial changes.

Continued Tensions: While fighting ceases, the underlying tensions remain high, and the region faces ongoing risks of further conflicts.

Shift in U.S. Influence: U.S. influence in the region may diminish, while Israel faces increased diplomatic isolation.

Regional Reconstruction: Reconstruction efforts in Israel, the UAE, Bahrain, Qatar, Iran, and other affected countries would begin.

Stabilized, Yet Elevated, Energy Prices: Although energy prices may stabilize, they will likely remain elevated due to increased security risks.

Stalemate (Low-Intensity Conflict)

A stalemate would lead to:

Continued Uncertainty: The conflict would drag on at a low intensity, with no clear victor.

Weakened U.S. Alliances: U.S. allies in the Middle East may begin to distance themselves from Washington, seeking their own political and economic strategies.

U.S.-Russia Diplomacy: With the conflict unresolved, the U.S. could seek a diplomatic resolution with Russia, easing tensions in other areas.

Pressure on NATO: The U.S. and NATO’s support for Ukraine may dwindle, leading to concessions with Russia over disputed territories.

While it is impossible to predict the exact outcome of this war with certainty, the evolving situation requires close monitoring. This war could potentially be the most defining moment in post-WW2 history.

I encourage readers to share their predictions and continue to stay informed.

 

Tomorrow: Where does India stand in this conflict

 

Lessons from market cycles – Chapter 5

The years after the 2008 global financial crisis – from 2011 to now in 2026 – have been packed with big changes for financial markets worldwide.

The 2010s started on shaky ground:

·         The world was still recovering from the GFC. Globalization faced pushback. Europe's debt crisis worsened in countries like Greece (with “Grexit” talk), and the UK moved toward Brexit. Ultra-low interest rates and massive money printing (quantitative easing) in rich countries sparked fears of new asset bubbles and soaring commodity prices.

·         Gaps between rich and poor nations grew as aid dried up. The Arab Spring, Gaddafi's death, and Bin Laden's killing reshaped the Middle East. Immigration surged from poorer to richer countries. Protectionism and nationalism – forces that had faded after World War II – came roaring back. (Around 2011)

·         IBM's Watson won Jeopardy! in 2011, signaling the start of the AI revolution.

As the decade rolled on:

·         China overtook Japan as the world's second-largest economy in 2012 and helped launch the BRICS-backed Asian Infrastructure Investment Bank (AIIB) in 2013. Russia annexed Crimea in 2014. The UK voted for Brexit in 2016.

·         AI made huge leaps with deep learning and big neural networks (2013–14). AlphaGo beat a top human Go player in 2016.

·         Donald Trump became US President in 2016–17, sparking a US-China trade war from 2018 that slowed global growth.

·         Trust in traditional money wobbled a bit; cryptocurrencies caught on with everyday investors (2017–18).

·         The 2015 Paris Agreement kicked off serious climate action, boosting renewables fast.

Then came the end-of-decade shock:

·         COVID-19 hit in 2020, crashing economies and markets. Supply chains broke. Governments and central banks poured in record stimulus to avoid depression.

The post-COVID world looks different:

·         Inequality widened. Geopolitical fights grew fiercer and longer. Protectionism and nationalism shape policies more than ever.

·         Asset prices bounced back hard; stocks hit records. But central banks reversed course – hiking rates and tightening money.

·         Trust between countries eroded further. Russia invaded Ukraine in 2022, spiking energy and food prices. The Israel-Palestine conflict escalated in 2023. In 2025, India and Pakistan fought a short four-day conflict (May 7–10) after a terrorist attack in Kashmir triggered India's Operation Sindoor missile strikes. Then in early 2026 (starting February 28), the US and Israel launched major strikes on Iran (Operation Epic Fury / Roaring Lion), killing Supreme Leader Khamenei and others in a push for regime change, with Iran retaliating across the region – creating huge uncertainty in the Middle East.

·         AI large language models like GPT-3 went mainstream in 2022. Massive spending on AI data centers followed. Doubts grew about traditional IT services' future, and job losses sped up.

All these events reshaped markets, capital flows, policies, industries, and global power.

For Indian investors, this period brought its own ups and downs:

·         India handled the 2008 crisis fairly well thanks to earlier growth. But in 2013, a “taper tantrum” (US Fed signaling less QE) triggered capital outflows, plus high oil/gold imports and a weak rupee pushed the current account deficit to a record 6.7% of GDP. India was labeled a “fragile” economy – but RBI and government steps fixed it fast.

·         2014 brought a stable majority government after 25 years.

·         Demonetization in 2016 (scrapping high-value notes) hit small businesses hard and slowed growth.

·         GST rollout in 2017 added pressure on the unorganized sector.

·         COVID lockdowns in 2020 crushed SMEs and informal jobs again. Organized large firms gained market share. Government ramped up welfare support, straining the budget.

Stock market impacts:

·         These shocks weakened small/micro businesses. Bigger organized players took share. Many family businesses sold out to corporates or PE firms. Jobs got scarcer in some areas. Work-from-home spread. All this pulled millions of households – especially younger people – into regular stock investing.

·         Government boosted capex with big infra projects (roads, railways), plus incentives for manufacturing (chemicals, electronics, renewables) and defense amid global tensions. Theme stocks in these areas soared, often ignoring valuations.

·         New companies with unproven models launched IPOs at high prices.

·         Recently, geopolitical risks, sticky inflation, higher rates, and doubts about the financial system pushed gold and silver prices up sharply. Many investors shifted away from their planned mix to buy more metals.

·         But corporate capex and profits haven't met hopes. Government spending fell short too.

·         Higher US yields, a weakening rupee (hitting 89–92/USD range by early 2026), stretched valuations, and limited direct AI/semiconductor plays drove record foreign outflows (~$18 billion in 2025 alone).

·         After euphoric post-COVID years, markets disappointed newcomers. Many theme/momentum stocks corrected sharply. Gold/silver turned volatile below peaks. Even bonds underperformed.

·         The hardest hit were momentum-driven stocks popular with retail investors – when liquidity dried up, prices plunged with few buyers. This is classic: fast-rising assets on hype and easy money fall hardest when mood shifts. No single big event caused the recent correction – just stretched valuations, crowded trades, and a slow global macro change. When everything's priced for perfection, small letdowns cause big reactions.

My final lesson from all these cycles

Stick to a solid asset allocation plan. It's not about maxing returns every year – it's about matching your risk comfort, cash needs, and long-term goals through ups and downs.

Rebalance regularly and calmly. View equity dips (especially in good companies) as chances to allocate more for the long run, not panic signals. Keep fixed income and gold at planned levels – don't overload on fear.

Markets reward patience and discipline far more than chasing the latest hot theme or reacting to headlines. The best investors stay steady when others chase or flee.

This is the concluding part of the series. I will be happy to receive readers’ comments; especially if someone wants to share his/her experiences and lessons learnt from them.

Also read

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Lessons from market cycles – Chapter 4

The first decade of the 21st century was one of the most remarkable periods since World War II.

It started with big shifts:

·         The internet was quickly becoming part of everyday life. Trade, commerce, payments, and settlements were moving online and getting much faster.

·         The 9/11 attacks on New York's World Trade Center in 2001 changed global security forever. NATO took a zero-tolerance stand on terrorism. Internal security rules tightened everywhere. In 2003, the US and allies invaded Iraq and toppled Saddam Hussein's regime after 24 years in power.

·         China joined the World Trade Organization (WTO) in 2001, opening global markets to its products. With huge scale, advanced tech, and low-cost labor, China built massive trade surpluses with almost every country. It exported low prices (deflation) worldwide and lent money cheaply to developed countries to cover their fiscal deficits. China's economy accelerated, driving a big chunk of global growth.

·         Meanwhile, the global economy slowed sharply. World GDP growth dropped from 4.5% in 2000 to about 2% in 2001 and 2002. Stock markets crashed, and house prices fell in many places. To fight the slowdown, central banks and governments cut interest rates hard, made borrowing easier, and ran bigger deficits.

By mid-decade, all that cheap money created a huge credit bubble, especially in the US and parts of Europe:

·         Banks had plenty of cash and lent aggressively. Asset prices – especially homes – shot up.

·         Lenders invented ways to hide risky loans. They gave "subprime" mortgages to people with bad credit histories – often with teaser rates that later jumped, and little paperwork. Banks bundled these risky loans into mortgage-backed securities (MBS) and sold them to investors, offloading the danger while making more loans. They created even more complex products like collateralized debt obligations (CDOs) to spread risk further – without anyone fully understanding the dangers.

·         Rating agencies gave many of these high safety ratings anyway, misleading buyers.

·         In a low-interest world, investors chased higher returns and bought in, assuming house prices would keep rising forever.

·         Stock and bond prices soared. People borrowed heavily to invest. The painful lessons from the dot-com bust were quickly forgotten.

Toward the end of the decade, cracks appeared:

·         Early 2007 saw defaults at smaller US banks. By mid-2007, "subprime" was headline news, but traders kept betting big.

·         In September 2008, Lehman Brothers, a large US based investment bank, collapsed, triggering panic selling worldwide. Over the next 18 months, stock markets crashed globally. Banks failed or needed massive bailouts.

·         Several European countries (especially, Portugal, Italy, Greece, Spain – infamously nicknamed PIGS) teetered on sovereign default; some got IMF rescues.

·         The global financial system froze for weeks. Many compared it to the 1929 Great Depression.

·         Major economies coordinated to restart lending. Emerging markets gained respect – the old G-7 expanded to G-20. The world recognized China's manufacturing power, India's IT strength, Russia's energy, and Brazil's commodities. The "BRIC" idea (coined by Goldman Sachs in 2001) became a popular investment theme. Stocks bottomed in March 2009, but Europe's debt crisis dragged on until around 2013.

In India, the story had its own twist:

After the 1998 nuclear tests and sanctions, the government pushed big infrastructure projects like the National Highways Development Program (NHDP) and opened up more sectors to private and foreign investment.

·         Global cheap money flowed in. Rules relaxed for FDI in roads, steel, oil & gas, mining, telecom, aviation, power, cement, and real estate.

·         Companies borrowed abroad cheaply, often without hedging currency risk (assuming the rupee would stay strong or rates low forever).

·         Many big firms jumped into unrelated businesses: telecom, roads, power plants, metro rails, even windmills for tax breaks.

·         Smaller and midsized steel companies grabbed mining leases for coal and iron ore. Banks lent enthusiastically.

·         New “valuation” buzzwords appeared: “land bank,” “order book,” “MW under construction,” “road kilometers,” “proven reserves”, etc.

·         “Projects were built assuming decades of demand growth – ignoring near-term reality. Banks didn't worry much about cash flow to repay loans.

·         Then reality hit. Demand fell short. Courts cracked down on shady allocations (spectrum in telecom, coal/mining rights canceled). Cash dried up. Many road, power, steel, mining, telecom, and cement projects defaulted. Bank bad loans (NPAs) exploded, especially at public-sector banks. Credit and new investment froze. Growth slowed sharply. Several of the top-100 companies lost 80-100% of their value, wiping out investors.

The lesson I took away:

“Growth potential” matters in valuing a company, but it's not enough on its own. Survival comes first. Cash flows and the ability to stay solvent cannot be ignored in the rush to grow.

That episode reminded me once more: When money is too easy and everyone chases the next big thing, the cleanup is painful. Real progress needs discipline, not just dreams.

Also read

Chapter 1

Chapter 2

Chapter 3

Lessons from market cycles – Chapter 3

It was New Year's Eve 1999, the dawn of the new millennium. A close friend – a tech specialist at a top consulting firm – called to wish me a happy new year. He sounded unusually upbeat. When I asked why, he proudly said he had made a fortune in the stock market, his bonus was huge, and he had even taken loans for a luxury car and a bigger apartment. He had poured a lot into random "technology" stocks.

He urged me to jump in on a small tech company about to launch an ADR (American Depositary Receipt) on Nasdaq. Its price had shot from ₹15 to ₹85 in just six weeks. “It will hit ₹250 soon”, he said with total confidence.

I actually knew more about that company than he did. It was basically a shell – recently renamed from “XYZ Securities Ltd” to “XYZ Infosys Limited.” No real business, no employees, no assets. When I tried to warn him, he brushed me off: “You have no idea what's coming”.

That Diwali in 2000 turned out to be the darkest day of his life. He had lost everything – his job, savings, home, car, marriage, health, and his confidence. He moved back to his parents’ house carrying debt of over ₹70 lakh.

The run-up from December 1998 to February 2000 was one of the wildest periods in Indian stock market history. The Nifty50 index more than doubled (over 120% gain) in just 15 months, driven mostly by “new-age” tech, media, and telecom companies. Buzzwords like ICE (Information, Communication, Entertainment) and TMT (Technology, Media, Telecom) were everywhere.

To really understand the magnitude of madness, one needs to note the challenging backdrop:

Politically, India was unstable. From May 1996 to October 1999 – just 40 months – we had three general elections. Each produced hung parliaments and shaky coalitions of 20+ parties.

Economically, things were rough. GDP growth crashed to around 4.3% in FY98 (from 8% the year before). Consumer inflation averaged over 13% in 1998, peaking at nearly 20% in late 1998. The RBI jacked up its Bank Rate to 11% early that year, hiked repo rates sharply (up to 14% by mid-2000), and prime lending rates hit 13–14%. Riskier borrowers paid 15–19%.

Geopolitically, we fought the Kargil War with Pakistan in May–July 1999. Tensions with China rose too – India openly called China “Enemy No. 1”, and China backed Pakistan during Kargil.

Internationally, after India's nuclear tests in May 1998 (Pokhran-II), the US, Japan, and others slapped on economic, tech, and military sanctions.

Globally, the US Fed's easy money policies fueled a massive dot-com bubble. Tech companies with no profits or clear business models traded at insane valuations.

The Y2K scare created huge demand for software fixes. Indian IT firms sent thousands of engineers abroad to update old systems before January 1, 2000. Suddenly, every middle-class family wanted their kids to learn coding. Computer coaching centers popped up on every street. Wipro's Azim Premji briefly became one of the world's richest people (second at one point in early 2000). Infosys and TCS turned into household names.

Hundreds of companies slapped “Technology”, “Infosys”, “Media”, or “Communication” onto their names. Big business houses rushed to launch tech subsidiaries. Overnight, firms with zero tech know-how or real business popped up and soared to crazy prices.

Old valuation rules went out the window. People talked about “eyeballs” and “footfalls” instead of earnings. Just like Harshad Mehta in the early '90s, operators like Ketan Parekh manipulated stocks – especially a group called the "K-10" – luring everyday investors like my friend with hype and fancy jargon.

The bubble burst in February 2000. The Nifty gave back all those gains over the next 18 months. By September 2001, it was back to December 1998 levels. Most fake tech companies disappeared fast. Many big groups quietly dropped their IT dreams and refocused on core businesses.

The few solid players that survived the storm? They went on to make India a global IT services powerhouse and added real strength to our economy.

My lesson from this episode

Tech revolutions are disruptive and powerful – they eventually make economies and markets stronger. But not every investor has to jump in headfirst during the chaos. Sometimes the smartest move is to watch safely from the sidelines until the storm passes. There are always plenty of good opportunities once things calm down.

That experience with my friend still reminds me: When excitement drowns out common sense, step back. Real winners in stock markets are found with patience, not panic buying.

Also read

Chapter 1

Chapter 2

 

Lessons from market cycles – Chapter 2

The Over the Counter Exchange of India (OTCEI) was set up by public financial institutions in 1990, and started operations in 1992. It was India's first stock exchange with fully computer-based electronic trading – beating even the NSE, which began in 1994.

OTCEI was inspired by America's NASDAQ. Its main goal was to help small, tech-focused entrepreneurs – especially those building new products – raise money easily and cheaply.

Back then, listing on the Bombay Stock Exchange (BSE) needed at least ₹10 crore in paid-up capital (other regional exchanges asked for ₹3 crore). OTCEI? Just ₹30 lakh. That low bar was meant to open doors for tiny, promising companies.

The listing process was different and more transparent:

·         A company placed its shares with a "sponsor member" (like a guide or underwriter). 

·         At least two market makers were appointed to always be ready to buy or sell shares. 

·         The sponsor sold shares to investors through dealers. 

·         After that, investors could trade freely.

It looked modern, fair, and low-cost – the same system that worked well in the US.

At its peak, OTCEI had 30 sponsor members, 118 active brokers, and over 1,000 dealers nationwide. Around 115 companies – mostly small ones started by first-time entrepreneurs – raised money on OTCEI.

Yet this pioneering, fully automated exchange turned out to be a big failure. It collapsed in under five years, though it wasn't officially shut down until SEBI de-recognized it in 2015, and the company went into liquidation in 2017.Almost every company listed on OTCEI ran into serious trouble; most eventually shut down or got liquidated.

Why did it fail so badly? The biggest reason was inexperience everywhere:

·         The exchange managers had never run a stock exchange before.

·         Brokers and members weren't used to transparent, regulated, tech-driven trading – and they didn't have good research skills.

·         The promoters listing their companies were mostly first-generation entrepreneurs with limited money, poor financial know-how, and untested products or technology.

·         Investors were newcomers too; they didn't really understand these new-age businesses or the huge risks.

Everyone treated OTCEI like a casino – chasing quick jackpots. In the end, nobody won. Investors lost money, companies struggled, brokers earned little, and even the exchange itself made almost nothing.

The same story has come back, this time through the BSE SME platform (launched 2012) and NSE Emerge (also 2012). Since then, over 1,400 small and medium companies have done IPOs on these platforms.

Some have done well – more than 500 grew big enough to "graduate" to the main BSE or NSE boards. But a large chunk – around 60% in many recent analyses (with figures like 57-65% in 2024-2025 data) – are now trading below their IPO price. That means heavy losses (often 25-80%) for investors who bought at the offer.

Clearly, regulators, exchanges, brokers, and investment bankers haven't fully learned from the OTCEI disaster. Valuations get pushed too high, issues get oversold to clients, warnings about SME risks stay too mild, and investors keep hunting for that one big winner.

The lesson hits hard: The more things change, the more they stay the same. This time around, it's really no different.

Lessons from market cycles – Chapter 1

My association with the Indian capital markets started in the early 1990s. There were 29 recognized stock exchanges in the country, most having a set of exclusive listed companies, besides companies with listing on multiple stock exchanges. These stock exchanges were mostly run as an association of individual brokers, with no regulator overseeing their operations. There was little transparency in their operations.

During 1992-1994 establishment of SEBI as statutory regulator, abolition of capital controls; advent of computer-based stock trading and demutualized stock exchanges (NSE and OTCEI) redrew the map of the Indian capital markets.

This was the time when the economy was opening up at a rapid pace. In particular, the financial sector was witnessing substantial changes. The regulatory framework, product spectrum, market breadth, accessibility, and participants’ profiles, etc. were undergoing a metamorphosis of sorts.

As a student of the capital markets, I noted the following trends in that phase:

·         A new group of intermediaries joined the markets as broker and merchant banker. These were mostly professionals (Chartered Accounts and Company Secretaries) who were admitted as members by stock exchanges or licensed by the SEBI to operate as merchant bankers. This ended the century old stronghold of a few families on the capital market intermediation business.

·         A new set of entrepreneurs emerged (mostly ex bankers and finance professionals) to undertake the business of financing and leasing.

·         Enhanced transparency in stock market operations and assurance of a proper regulatory oversight drew millions of households to the equity investing for the first time. Stock market movements started to appear in media headlines and parliamentary discussions.

·         The share of household financial savings deployed in stocks and mutual funds increased to the highest level.

·         The number of initial public offers (IPOs) increased from 195 in FY92 to 1402 in FY96, implying more than 5 IPOs on every working day of the year.

·         A large proportion of these IPOs were of non-banking financial companies (NBFCs). Most of these companies were small, inadequately capitalized, and promoted by inexperienced entrepreneurs. Many of these companies mobilized unsecured deposits at exorbitant rates.

·         Almost every established business house in the country also incorporated an NBFC and entered the business of financing and leasing in this era.

·         A significant number of non-financial companies changed their names to sound “financial” in this phase. Finserve, Finlease, Finance & Lease were common in names of most of these companies.

·         A significant number of these IPOs were sham (accommodative entries).

The lesson was painful but crystal clear

Within a few years, a large number of these companies simply vanished, wound up, went bankrupt, or quietly changed their names again to remove the “fin” words.

Ordinary investors – many of them first-timers who were either unaware or simply greedy for high returns – lost heavily, whether they had bought the shares or parked money in those unsecured deposits.

That was my first big lesson from the markets: “when everything looks too good and too many new players rush in, caution is your best friend”.