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Living through the Lehman Brothers and US subprime crisis made me stronger: Dipan Mehta

September 14
10:56 2018

Dipan Mehta

Member, BSE, NSE

The Lehman Brothers bankruptcy was 10 years ago but the events of that day and the weeks and months before and after are still fresh in my mind.

For many of us in India, the developments in the US were difficult to understand. It was the first time that we had faced such a global crisis and apart from relentless FII selling, there were no fundamental domestic reasons for the crash.

Corporate earnings and domestic economy were strong and local investor sentiment was upbeat, yet equities were crashing. We were glued on to media channels watching the drama unfold on Wall Street and its resultant collateral damage to our markets.

During that period, I learned more about the global economy, its interconnected nature and the impact of “Wall Street” on “Main Street”, than all the decades of learning before that.

Since we were engaged in trading and arbitrage, daily profits soared due to high volumes and a secular downward trend which provided an ideal trading opportunity.

However, portfolio values were sharply eroding and that was distressing. There were rumours of brokers facing liquidity crisis but no defaults were reported and that demonstrated the strength and resilience of our settlement and risk management systems.

Our internal operations faced zero disruptions and clients and prop traders were able to trade seamlessly.

In the first phase of the US subprime crisis, many market pundits thought it provided an entry point for long-term investing; but the intensity of selling and incessant bad news about the survival of marquee global banks eventually took a toll on investor sentiment.

The mood was sombre as we entered 2009. I think the back of the long-term investor was broken in early 2009 when even the bluest of blue chip stock cracked and it seemed that there was no hope for equities.

That was the perfect entry point for investing but little liquidity available for investing and therefore very few investors took advantage of that buying opportunity.

What worked was if an investor did not indulge in panic selling and held on to quality stocks, then the prices recovered well from March 2009.

The most important learning from the Lehman Brothers crisis was that investors realised they needed an advisor/professional to invest in stocks on their behalf.

After the US subprime crisis, there was the European sovereign debt crisis and for more than four years till September 2013, small investors shunned stocks.

However, when they did return, instead of doing it themselves, they invested through mutual funds and that fundamentally changed the complexion of our capital market.

For the first time in our history domestic savings to the tune of thousands of crores was being channelised into productive assets.

Finally, we had strong domestic institutions which could counterbalance the power of the FIIs. Our reduced dependence on global flows has reduced volatility and improved investor confidence.

In conclusion, living through the Lehman Brothers and US subprime catastrophe has made me stronger by mentally preparing me to face such future situations and provided me with learnings which will last a lifetime.

The crisis taught me to avoid leveraged positions, invest in quality stocks, diversify the portfolio and remain invested through a global crisis.

Disclaimer: The author is Director, Elixir Equities. The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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