Markets do not rise in a straight line. Every long-term chart contains steep declines that felt catastrophic at the time and look like small dips in hindsight. The BSE Sensex has experienced several such episodes since its inception, from scandals and financial crises to a pandemic-driven plunge. Studying how the wider BSE Indices behaved in these phases reveals patterns that remain relevant today. For anyone building wealth over decades, history is a teacher worth listening to.
The Scam Era of the Early 1990s
In the early 1990s, a big securities scandal revealed the problem in the settlement systems and controls. In prices, surges caused by speculation quickly collapsed, and many investors incurred heavy losses. This episode led to far-reaching changes: a more powerful market regulator was created, a system of electronic trading was developed, dematerialised shares and stricter disclosure norms were adopted.
Thus, crises are good because they lead to structural improvements. The market turned out to be more transparent and better regulated, which allowed its further development and involvement of the widest possible range of investors.
The Technology Bubble and Its Aftermath
At the turn of the century, there was a bubble in technology shares that burst with devastating consequences for the market. Similar situations happened in India too: enthusiasm about tech companies drove prices to unrealistic heights, and a change in mood quickly led to losses. However, some companies’ stocks turned out to be fairly priced and soon appreciated significantly.
The main lesson of this episode is that one should be wary of market narratives that serve as a growth driver for any share price. When a story dominates the market chatter and prices ignore the fundamentals, it is time to reconsider the investment thesis.
The Global Financial Crisis
The 2008 global financial crisis was another challenge for the Indian stock market. In response to the crisis, foreign institutional investors rapidly sold off their shares, causing the Indian benchmark to plummet by more than fifty per cent from its peak within a year. Many investors borrowed money to buy securities and quickly had to sell assets worth much more than they expected.
Nevertheless, this bear market was short-lived, and the market soon recovered to a level comparable to the peak. Moreover, due to the policy of systematic investing, many individuals who invested in the market at the time of the crisis were able to take advantage of the decline in prices. Thus, the longer the contributions were made, the more the initial cost of the shares was lower, which allowed investors to make the best profit.
The Pandemic Shock of 2020
The COVID-19 pandemic caused a significant slump in the market in March 2020. A rapid wave of lockdowns and uncertainty caused the Indian benchmark to decline by thirty-five per cent over several weeks. Many market participants feared that the situation would lead to a prolonged depression.
However, what came next can hardly be called a crisis. Massive government support, liquidity injections and the entry of millions of retail investors into the market caused a frenzy on the stock market. Within a few months, the indices hit a new record high. This episode also saw the opening of millions of new demat accounts.
Common Threads
Looking at these crises, one can detect some common threads. First, the market decline was due to a combination of overvaluation, leverage and unexpected events, while the timing of such crises cannot be predicted. Second, it is usually the most optimistic when everyone is talking about the worst-case scenario — the opposite is wise to do. Third, if panic causes panic selling of securities, this will translate into losses; conversely, the longer the investment is held and the more systematic and disciplined the investor is, the greater the profit will be.
Fourth, one should be wary of leverage: borrowed money turns losses into losses for good. Finally, it is vital to have an emergency fund which would cover at least six to twelve months of expenses so that you are not forced to sell securities at a low price to cover expenses. It is also essential to have a risk management strategy, balanced portfolio and a well-documented plan for acting in crisis. You must not deviate from it when panic sets in. A possible action plan could be, for example, a systematic withdrawal of funds from the market or a reduction in the share of risk assets if their share in the portfolio has decreased significantly.
Perspective for the Long Run
Each crisis is scary, but in the long run, they all are helpful to the market. India’s economic growth, profitability of corporations and savings of millions of Indians have allowed the market to reach new heights. These growth opportunities would not be available to investors if not for the corrections. Therefore, it is vital to perceive them as a fact of life and base your investment decisions on balanced considerations.
