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Thursday, 22 October 2020

What Scam 1992 & Harsha Mehta taught me

The Scam – The Harshad Mehta Story is a recently launched web series on SonyLiv. It is very well made, fast paced, and sticks to the storytelling instead of digressing here and there. It is the best market related movie (I include all video content in this “movie” class) on Indian markets by a long way.

I have read the book on which this is based on. The book had all the original names of the people involved. For some reason, a few people got renamed in the show. So, characters portraying Ajay Kayan, Rakesh Jhunjhunwala, Radhakishan Damani were not called out explicitly.

Although, the book is a great read and the web series is an even better watch, here are some to the lessons that I took away from the whole period and sequence of events.

-        Unbridled Ambition -  I think this was the main reason why Harshad got into trouble. He did not know where and when to draw a line. He came from a modest background and wanted to grow too big too fast. He did not consider the consequences of his actions, because he always wanted more.

-        Leverage Kills – Ultimately, it is when you are over-leveraged is when you get into real trouble. Liquidity is king. Harshad’s efforts were concentrated on leverage to pump in liquidity. The problem is no one is bigger than the market. In his hubris, I think he forgot that.

-        The End Do Not Justify The Means Harshad used to say that what he was doing was being done by everyone else. All the big players were following the same corrupt practices. Actually, it makes no difference if everyone is doing the wrong thing. It is still wrong. The problem with being on the wrong side of the law is that it’s a slippery slope. You start with a small digression, and very quickly it snowballs into something out of control. This is exactly what happened with Harshad which led him to eventually claim that he bribed the then Prime Minister.

-        Market Personified – When he was leading the markets he became a media darling, the first real Big Bull. His ostentatious lifestyle, his Lexus, his larger than life image in the media were also major contributors to his downfall. Firstly, it attracted detractors who felt sidelined or spited or were simply envious of his meteoric rise. Secondly, it gave a face to the good and equally importantly, the bad of the markets. So, when the markets crashed, it was Harshad who had to take probably a larger share of the blame. Personification is a concept popularized by Daniel Kahneman and it played out perfectly in this instance.

-        Alternate Histories – Radhakishan Damani, RKD as he is more popularly known is believed to have told a few of his friends: "Agar Harshad saat din aur apni position hold kar leta, toh mujhe kathora leke road par utarna padta." (Had Harshad held his position for seven more days, I'd have taken a begging bowl and walked on the road). At that time, no one knew how the dice will get rolled and that RKD would become a great businessman and investor. The same is true of Rakesh Jhunjhunwala. Always be aware that winners and losers are known only in hindsight and the most intelligent course of action is to be conservative and prudent while investing.

-        Karma Catches UpUltimately, Harshad was running a sort of Ponzi scheme, where increasing amounts of cash was required to keep the markets propped up. His wrongdoings brought down so many people who trusted him blindly and bought shares based on his advice.

A great study in contrast is Warren Buffett and Charlie Munger. More than their investing acumen, I am a great admirer of the way they have conducted their life and business.

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