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Why investors should welcome crises in economy


By Dhirendra Kumar

There’s a really trite saying that ‘when the going gets tough, the tough get going.’ However, no matter how cliched this sounds, the fact is that it’s a cliche because it’s true. While this saying is generally trotted out to inspire students and sportspersons and so on, it’s actually of great practical use for investors. Whether it’s investment strategies, or stocks, or mutual funds, or investment managers, you cannot evaluate anything effectively unless there’s a crisis. When the expected is happening, everyone does well. Most strategies appear to be good. Most companies look like well-run outfits. Only when events deviate from the script and a crisis hits, or multiple crises hit, that it becomes clear what’s good and what isn’t.

From this observation, follows a conclusion that may be surprising to some investors but makes perfect sense. Investors should welcome problems and crises in companies and sectors that they are invested in. Take an obvious example from Indian business—that of airlines. At one time, fuel was relatively cheap and so was money.

Competition was modest and no one was overly interested in cut-throat pricing. Customers were used to delays and inefficiencies because no domestic airline was all that much better than any other. The base standard was set by Air India and Indian Airlines and if an airline was somewhat better than the public sector outfits, then customers were happy and actually grateful that they didn’t have a terrible experience.

So let us imagine for a moment that nothing much ever changed from the above situation. In that case, as investors, you may never have discovered that the IndiGo management was vastly more competent than the Jet Airways management. Maybe IndiGo would have done a little better sometimes, or maybe not. Basically Naresh Goyal would have appeared to be about as good an airline entrepreneur as Rahul Bhatia and Rakesh Gangwal. As we now know, that’s far from the truth, but the point is that we know this only because in terms of regulations, cost and competition, the going got tougher in the airline business. Of course, IndiGo is now facing an internal crisis and in a way we should welcome that because that’s yet another test whose outcome will tell us whether the airline will live up to its true potential.

Airlines are just an example. The same is true for virtually every sector facing a crisis in India. Actually, this idea of crisis as a test for quality runs much wider. Crises are not just a test, they are a mechanism of evolutionary selection. When the dud businesses fall by the wayside, it clears the way for better ones. Resources get freed up, and general quality improves. This is the reason why one of the most important reforms that have taken place in India is the bankruptcy law and related rules. Pretending that dead businesses are actually okay is one of the worst things to do and could be the most damaging legacy of the old Indian economy.

In recent days, there has been a spate of lament on social media about how some stocks have collapsed to a 50th or even less than what they once were. I think it started with some research outfit tweeting such a list and then a chorus of investors joined in, taking this as proof that there was something wrong with the stock markets. I would argue the opposite in most cases. A book that I read recently pointed out that globally, the industry with the highest mortality rate of businesses was infotech, and yet that’s the industry that has had some of the biggest successes and has transformed our world.

Is there a paradox here? I don’t think so. Computers and software have developed so magically precisely because failures are ruthlessly and rapidly weeded out. That failures should fail quickly and obviously is a great feature of any business environment and investors should look out for failures because they are much more valuable indicators than successes.

(The author is CEO, Value Research)





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