Police arrives on the scene at last …

No, this post is not about a Bollywood film. This is about financial markets. Here, too the police arrives on the scene in the end in most cases – there are exceptions, though.

The SEC Act was passed by the US Congress after the stock market crash of 1929-1933. The Indian parliament passed SEBI Act in 1992 after the market had crashed.

We would see many new regulations come up after each episode of a market crash. However,. the crashes cannot be stopped. The advantage of new regulations is that some elements are discouraged to try and take advantage of the gullible.

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Samudra manthan – Excessive turbulence

Think of all market turbulence as “Samudra manthan”. In the mythological story of samurai manthan, so many things came out, including poison and nectar. The market turbulence is no different. Every market turbulence brings out some poison and some nectar.

The poison kills many investors’ portfolios and reputations of some experts. On the other hand, we have seen in some episodes how the turbulence brought out the best. Some examples of the nectar are:

  • Birth of Securities Exchange Commission, Federal Deposit Insurance Corporation and Federal Reserve bank after the great depression
  • Beautiful tulip gardens of Amsterdam
  • Birth of SEBI, NSDL, NSE after the great Indian securities scam. Innovations like screen based trading, dematerialisation of securities, rolling settlement, etc.
  • Birth of companies like Amazon, Google, etc. in the DotCom boom

Such churning of the ocean is required to bring out the nectar.

Police always comes in the end

We all know that in the Bollywood movies, the police always comes in the end. Ditto for financial markets, too.

SEBI Act was passed by the Indian Parliament after the debacle of 1992. It was only after the scam was unearthed, that the act was passed, though SEBI (Securities and Exchange Boards of india – the regulator for securities markets in India) was set up in 1988.

Even in the US, after the great market crash of 1929-1933, SEC (Securities Exchange Commission – the securities market regulator) and FDIC (Federal Deposit Insurance Corporation – the corporation that insures bank fixed deposits).

The only difference between a movie and real life is that while in the movies the police comes after the villain has been beaten up by the hero, in reality it is the common investor who gets bashed up before the police arrives.

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Memory is far more effective than law

John Kenneth Galbraith wonderfully put in the foreword to his book “The Great Crash – A Classic Study of That Disaster”: “As a protection against financial illusion or insanity, memory is far better than law. When the memory of the 1929 disaster failed, law and regulation no longer sufficed. For protecting people from the cupidity of others and their own, history is highly utilitarian. It sustains memory and memory serves the same purpose as the SEC, and, on the record, is far more effective.”

To add to what Galbraith wrote: Even the law has to be remembered.

Read “Riding The Roller Coaster – Lessons from financial market cycles we repeatedly forget” again and again.

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