It's greed that did the damage to investors

There is a big lesson to be learnt from the current market meltdown. If you are greedy, there is always someone to exploit your greed. Reflect on the past and you will know what a sucker you have been. Investing is all about having a long-term view, expecting a reasonable rate of return and it has to be done with own funds. Even if you buy a bond with borrowed money, it is speculation.

It has become a fashion to sit in front of TV to watch market channels and trade. Experts appear on screen and feed you with different investment tips and futures and options strategies. People start trading on such tips, and soon the addiction starts. The current meltdown is the result of such huge speculation positions unwinding, leading to huge losses for investors. Now, who is to be blamed if investors chose to speculate in such a way? The investors.
The greed to make money was so strong that people wanted to buy more stocks than they could afford.

Brokers and bankers, in the form of providing margin funding to clients, exploited this opportunity. This led to people leveraging their positions and over-trading. When markets fell and investors were not able to pay their margin calls, their positions got liquidated. This has resulted in huge losses for investors. Did investors not know that it is wrong to borrow and over-trade? Who is to be blamed?

We had created a casino culture by mindlessly including various scrips in the Futures and Options segment. The blame rests with stock exchanges. By doing so, we were only inducing people to speculate more and more with just 10% funding. On the other side, we have the banking sector, which is well regulated by RBI with strict lending norms and checks and balances. But this was rendered ineffective as stock exchanges allowed 90% leveraging and there were no restrictions on broker lending to clients.

This built up the speculative bubble and the F&O market became the crocodile pond for investors.

The sad fact is that we lacked the right leadership at every level. Be it the stock exchanges, banks, brokers, investment bankers, the media or so on. All were equally greedy to make a fast buck. This reminds me of the book “The Barbarians at the Gate”.

(The author is chairman, Parag Parikh Financial Advisory Services)