Bulls, Bears and Other Beasts

1. Early Exposure Shapes a Market Player's Grit

Looking back, I feel I was always inclined to get on the wrong side of the law, despite the decent upbringing my parents provided me.

Tough beginnings. Lalchand's (Lala's) formative years in a crime-ridden Mumbai suburb instilled in him a street-smartness and a willingness to bend the rules, traits that would later prove both advantageous and detrimental in the stock market. His early brushes with delinquency and exposure to the harsh realities of chawl life shaped his risk appetite and his understanding of power dynamics.

Finding direction. Despite his inclination towards trouble, Lalchand's father's sacrifices and his siblings' academic success created a sense of responsibility, pushing him to seek a legitimate path. This internal conflict between his past and his aspirations fueled his determination to succeed in the stock market, a world where both cunning and discipline were essential.

Unexpected opportunities. A chance encounter with a college classmate opened the door to Dalal Street, offering Lalchand a way out of dead-end jobs and a chance to prove himself. This opportunity, combined with his inherent daring and mathematical aptitude, set him on a path to navigate the complex and often treacherous world of the stock market.

2. Dalal Street's Culture: A Blend of Ruthlessness and Opportunity

There are plenty of rags-to-riches stories on Dalal Street that get talked about often. What does not get publicized as much are the riches-to-rags stories, which far outnumber the success stories.

A high-stakes arena. Dalal Street in the late 1980s was a world of immense opportunity, but also cutthroat competition, where fortunes could be made or lost in a matter of hours. The market was dominated by powerful brokers who speculated with their own money, and insider trading was rampant due to the lack of publicly available information.

Ethical ambiguity. The line between legitimate trading and unethical practices was often blurred, with insider information and front-running being common occurrences. This environment demanded a certain level of ruthlessness and a willingness to navigate the gray areas of the law.

The players. The market was populated by a diverse cast of characters, from powerful brokers like Manu Manek and Nemish Shah to company promoters and institutional investors like UTI. Understanding the motivations and tactics of these players was crucial for survival and success.

3. Mastering Market Mechanics: Jobbers, Auctions, and Sauda Pads

Of all the players in the stock market, it was the jobber whose role fascinated me the most.

The role of the jobber. Jobbers were essential for creating liquidity in the market by offering two-way quotes and facilitating price discovery. They took on risk by buying and selling shares for their own account, and their ability to quickly assess market sentiment and perform mental calculations was crucial for their success.

Auction dynamics. The auction system for undelivered shares was another key aspect of the market, offering opportunities for profit but also potential for manipulation. Understanding the rules and the players involved was essential for navigating this market.

The Sauda Pad. The sauda pad, or deal sheet, was the primary record of trades, and disputes over trades were common. The color of the sauda pad itself contained information about the traders, with broker-owners having pink sauda pads, while their employees and jobbers had blue ones.

4. Ethical Flexibility: Navigating the Gray Areas of Trading

Rule number one: if you are dealing straight, you’ll get the same from me. And if you are looking to steal . . . I will deal with you likewise.

A moral compass. Lalchand developed a pragmatic approach to ethics, mirroring the behavior of those he interacted with. He believed in dealing honestly with those who were straightforward, but was willing to use deception and manipulation against those who sought to exploit him.

Information as currency. Information was a valuable commodity in the stock market, and Lalchand was willing to pay for it and use it to his advantage. He cultivated relationships with back-office staff and other insiders to gain access to information that could give him an edge.

Tit for tat. Lalchand's willingness to retaliate against those who wronged him, even if it meant bending the rules, demonstrated his determination to succeed and his refusal to be taken advantage of. This approach, while effective, also created enemies and put him at risk.

5. The Allure and Peril of Inside Information

I became good friends with Bunty who was managing the treasury operations of a leading non-banking finance company (NBFC) of the time.

The value of connections. Lalchand's ability to cultivate relationships with key players in the market, such as Bunty, provided him with access to valuable information and opportunities. These connections allowed him to gain insights into market trends and potential deals.

The temptation of insider trading. The line between legitimate market intelligence and insider trading was often blurred, and Lalchand faced the temptation to use confidential information for personal gain. His decision to resist this temptation, at least in some cases, demonstrated his growing awareness of the risks and ethical implications involved.

The risks of crossing powerful players. Lalchand's encounters with AS and PS, two notorious "robbers" in the market, highlighted the dangers of crossing powerful players. Their threats and intimidation tactics forced him to navigate the market with caution and to protect himself from potential harm.

6. Harshad Mehta's Rise: The Equity Cult and Money Market Games

Harshad’s scale of activity had increased considerably by then, and the big moves in stocks like ACC, Apollo Tyres, Gujarat Ambuja, Tata Tea and SPIC were being attributed entirely to him.

The Big Bull's influence. Harshad Mehta's rise to prominence marked a shift in the Indian stock market, as he popularized the "equity cult" and attracted a new wave of retail investors. His ability to move stock prices and his flamboyant lifestyle made him a celebrity on Dalal Street.

Money market manipulations. Harshad's success was fueled by his manipulation of the money market, where he exploited loopholes in the ready forward system to divert funds into the stock market. This allowed him to drive up share prices and create a self-fulfilling prophecy of rising valuations.

The "replacement cost" theory. Harshad advocated the "replacement cost" theory to justify the absurd valuations of his favorite stocks, arguing that they should be valued based on the cost of creating a similar company, rather than on their earnings potential. This theory, while flawed, gained traction in the market and further fueled the speculative frenzy.

7. The Big Bull's Fall: Hubris, Policy Shifts, and Market Realities

The Big Bull eventually ran out of luck in April.

Overconfidence and recklessness. Harshad's success led to overconfidence and recklessness, as he began to believe in his own invincibility and took on increasingly risky positions. His public humiliation of his rivals and his disregard for market fundamentals ultimately contributed to his downfall.

Policy changes and exposure. Policy changes in the money market and the establishment of SEBI created a more regulated environment, making it harder for Harshad to continue his manipulations. The exposure of his financial irregularities led to his arrest and the collapse of the market.

The aftermath. The securities scam tarnished many reputations on Dalal Street and ended many promising careers. It also served as a cautionary tale about the dangers of unchecked speculation and the importance of ethical conduct in the financial markets.

8. Mentorship and Integrity: Building a Sustainable Career

I prize integrity more than smartness.

Finding a mentor. Lalchand's association with Govindbhai (GB) marked a turning point in his career, as he gained a mentor who valued integrity and provided him with valuable insights into the market. GB's emphasis on confidentiality and ethical conduct helped Lalchand develop a more sustainable approach to trading.

Learning from experience. GB's stories and experiences provided Lalchand with a broader perspective on the market and its history. He learned about the importance of relationships, the dangers of greed, and the cyclical nature of booms and busts.

Choosing integrity. Despite the temptations of easy money and unethical practices, Lalchand chose to prioritize integrity and build a reputation for honesty and reliability. This decision, while not always the most profitable in the short term, ultimately proved to be the foundation for his long-term success.

9. The Rise of NSE: Transparency and the End of Old Practices

With the entry of the National Stock Exchange (NSE) and the introduction of screen-based trading in 1994, this practice ended, as clients could verify what prices their shares were traded for.

Transparency and efficiency. The arrival of the National Stock Exchange (NSE) and the introduction of screen-based trading revolutionized the Indian stock market, bringing greater transparency, efficiency, and liquidity. This ended many of the unethical practices that had been prevalent in the old open outcry system.

Leveling the playing field. The NSE's membership structure, which allowed anyone to become a member by paying a deposit fee and clearing an exam, opened up the market to a new breed of brokers and investors. This challenged the closed-club culture of the BSE and created a more level playing field.

The end of an era. The NSE's success forced the BSE to adapt and modernize its systems, marking the end of an era of broker dominance and ushering in a new age of technology-driven trading. This shift also empowered investors with more information and control over their trades.

10. IPO Mania: From Easy Money to Cautionary Tales

Public memory being short, caution was once again thrown to the winds when mini-steel and mini-cement companies started hitting the market to raise capital in the late 1980s.

The allure of IPOs. The primary market for initial public offerings (IPOs) offered opportunities for quick profits, but also posed significant risks. The lack of regulation and the prevalence of dubious companies made it essential to exercise caution and due diligence.

The grey market. The grey market for IPOs, an illegal market for trading in shares before they were listed, provided opportunities for speculation but also exposed investors to fraud and manipulation. Understanding the dynamics of this market was crucial for navigating its risks.

The MS Shoes fiasco. The MS Shoes public issue served as a cautionary tale about the dangers of investing in companies with questionable promoters and inflated valuations. The episode exposed the lax oversight by SEBI and the corruption within its ranks.

11. Global Crises and Local Fortunes: Riding the Waves of Change

I made over Rs 1 lakh from my trades in April. What saved me was my decision to put aside some money for the donation to get Satish into an engineering college.

Global events, local impact. Global events, such as the Asian currency crisis and the Russian debt default, had a significant impact on the Indian stock market, creating both opportunities and risks for traders. Understanding these global trends was essential for navigating the market.

The importance of diversification. The market downturn highlighted the importance of diversification and risk management. Those who had diversified their investments and avoided excessive leverage were better positioned to weather the storm.

Contrarian opportunities. While many investors were panicking and selling, contrarian investors saw the market downturn as an opportunity to buy quality stocks at bargain prices. This required a long-term perspective and the ability to resist the herd mentality.

12. The Enduring Lessons: Humility, Adaptation, and Ethical Boundaries

Skill, common sense, patience, inside information and, most importantly . . . kismat . . . it must be in your destiny to make money.

Humility in success. The market's volatility served as a reminder of the importance of humility and the need to avoid overconfidence. Even the most skilled traders could be humbled by unexpected events and market shifts.

Adaptability. The ability to adapt to changing market conditions and to learn from mistakes was crucial for long-term survival. Those who were willing to evolve their strategies and embrace new technologies were better positioned to succeed.

Ethical boundaries. The temptations of easy money and unethical practices remained a constant challenge. Maintaining a strong ethical compass and prioritizing integrity were essential for building a sustainable career and avoiding the pitfalls of greed and corruption.

Last updated: February 22, 2025