Dear Reader,
In a way, Abraham Lincoln caused India’s first stock market crash. No, this is not fake news. This was in 1863, over a dozen years before the Bombay Stock Exchange was set up. It was a time when informal trading of stocks used to happen regularly among Gujarati and Parsi traders in many locations in Bombay. The American Civil War, led by Lincoln, triggered a boom in cotton prices because the war had messed up the usual sources of cotton for the British and they started buying it from India.
The sudden surge in cotton prices inflated stock prices. Cotton became super valuable, like treasure; some called it White Gold. People were so crazy about it that they even tore apart their beds to sell the stuffing. Imagine cotton becoming too precious to sleep on! Expectedly, the stock market in Bombay was going wild. Share prices of made-up companies shot up like fireworks. But a wise industrialist named Cowasji Jehangir Readymoney saw the boom and smelled a rat. He saw trouble coming. He said, and business historians recorded his words: “Such practice will induce greatly more gaming in shares. I would wait and never have this sort of dangerous business for the present.”
Readymoney told his friends and partners that it was risky business, and discouraged them from it. Everyone of course did not listen, and the party continued. Just when they thought the good times would never end, the war ended and cotton prices crashed. The informal market tumbled. Suddenly, cotton wasn’t as valuable and share prices came crashing down. It was like a big balloon popping. Many rich and important families in Bombay went broke. It was as if, in today’s world, big names like Tatas, Birlas, and Ambanis were losing everything at the same time.
The whole episode taught everyone a big lesson: always be cautious with a boom.
Or so we thought.
If there is a single takeaway from all the stock market crashes, at least the major ones, that visited the world in general and India in particular, it is that some of the biggest busts came after mouth-watering booms. Take the Wall Street Crash of 1929, cited as one of the major causes behind the Great Depression. The Crash, one of the worst ever, came right after the Roaring Twenties, which saw exponential market growth, with the Dow Jones Industrial Average rising six-fold from 1921 to 1929. However, speculation, unsustainable valuations, and economic warning signs like rising interest rates created a bubble. Following a series of “Black” days in October 1929, the market plummeted, eventually in 1932 dropping to nearly 90 per cent from its peak. This triggered the Great Depression, a prolonged economic downturn with lasting global consequences.
There are many such examples. Take the Dot-Com Bubble of 2000. In the late 1990s, there was a massive boom in technology stocks, fueled by the rise of the internet. By the early 2000s, many internet companies were overvalued, and a series of high-profile bankruptcies and financial irregularities led to a sharp decline in stock prices. Or, the global financial crisis of 2008. It was triggered by the collapse of the subprime mortgage market in the US. This crisis led to another global recession, and stock markets around the world experienced sharp declines. Major financial institutions faced insolvency, and the crisis had a deep impact on the global economy.
Each time, there was more than one Readymoney to raise the red flag, and each time all warnings were ignored. That brings us to an important question. As economist C.P. Chandrasekhar asks in this sharp analysis, Is the Indian stock market headed for a crash? As we write this newsletter, the BSE Sensex, which has been on song of late, plunged over 600 points. If you’re a regular reader of the pink papers or a follower of these so-called fin-fluencers on social media, you are likely to be feeling hot and bullish about the Indian stock market and might even be pumping more money in. As is to be expected. Most financial assets have been doing wonderfully well; the Alpha Males have been talking about making “more money than god”; and even today’s crash, in comparison with the spike the indices have seen in the past few months, is a mere correction, the mavens will tell you.
But it would be wise to listen to Readymoney too, do a bit of history hopping, and look at the current market in the light of those learnings. Chandrasekhar’s piece can be a starting point for this.
Post-script: They say the market is a funny place. Every time one sells, another buys, and both think they are smart. How smart are you? Are you riding the wave or are you cashing it in? Let us know.
Wishing you a great week ahead,
For Team Frontline,
Jinoy Jose P.
