Opinion | Lessons from past crises and how to use them to deal with the present one
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PremiumIt feels like a crisis. Again. A pandemic is spreading across the world. A few billion people across continents are under a lockdown. Not something I anticipated or expected. I thank my stars for my privilege of being able to work from home in the organized sector. It is always hard to know what the future holds and today the haze over the future is dense. I decided to go back and look at the past.
In 1999-2000, I was part of a young company building one of India’s first online broking platforms. We had received venture capital funding from some A-list entities at that time. As a member of the core management team, I had options in the company. My personal investment portfolio went up five times during the boom period and was five times my annual income at that point. Almost all my wealth was in equities. Then came the crash in the markets starting March 2000. Not everything was bad though—my older child was born in May 2000.
Business became tough as revenues dropped. My wife decided to drop out of a corporate role in late 2000. We had swiftly moved from being a DINK (double-income-no-kid) family to a single-income-one-child family. Then my parents, with whom I was living, announced that they would relocate to another city in the middle of 2001, which meant I now had to rent a house.
In February 2001, the Ketan Parekh episode broke out which led to another sharp leg-down in the markets and for the business. Serious differences broke out about the way forward for the fledgling organization. By June 2001, it was the end of the road for me at the company. There has never been a worse moment in my life than when I had to convey to my team that many of them would be affected as well. As for the market—at the low point that year, my portfolio had dropped 80% from its peak and the options were worthless. And I needed a job.
The 2001 meltdown taught me the importance of asset allocation—I could not stomach the volatility of being 100% in equities. I also realized that, in my role, I needed the security of a house. A home for me and my family; never at any risk due to the markets or my job. It was also a brutal reminder of the dangers of leverage as I witnessed clients who had pyramided their fortunes in the bull market of 2000 lose that and more during the meltdown as the cycle reversed.
The global financial crisis of 2008 turned out to be very different. When the crisis erupted, we were a new, yet-to-be-licensed asset management company (AMC), with no clients or assets. August to October 2008 was brutal with the Nifty dropping over 50%. Then, in the space of a weekend in late 2008, our company ended up acquiring another AMC on attractive terms. Somebody else’s crisis became our opportunity.
The crisis in 2008 felt like the end of the world if you worked in the financial sector. Names that we considered blue-chips vanished overnight—laid low by excessive risk taking and faulty models. Just like today there was a haze of uncertainty about the future.
Today, conventional wisdom says that the unconventional monetary policies by central banks and government interventions got the economy back on its feet and drove a decade-long bull market in equities. But in 2009, that was not the consensus view. At that point, both the main street and the markets greeted the actions of the US Federal Reserve with skepticism. But when valuations are cheap and where fiscal and monetary policies are accommodative, the odds are favourable for long-term investment. That is my simple narrative for the decade after the global financial crisis. Unlike in 2001, the options I had in the AMC subsequently created value.
Looking back, I feel like I carry the imprint, professionally and personally, of every crisis that has shaped my career and my journey as an investor. You don’t get to know before a crisis happens, but you can be prepared and learn from it. Don’t ever let go of your asset allocation plan and avoid leverage like the plague. All investing choices are personal to you and your situation only. Don’t be surprised to find yourself bleeding when the sirens are blaring and there is blood in the streets. Every crisis brings forth challenges but could also be an opportunity. But you must have the financial wherewithal to act when the opportunity presents itself.
Vetri Subramanian is group president and head of equity at UTI Asset Management Co. Ltd
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