Nithin Kamath on Market Crashes: Greed Drives Boom and Bust Cycles
Every market crash follows the same script, according to Zerodha co-founder Nithin Kamath. The one common driver of every boom-and-bust cycle is greed, highlights Kamath, stating that first it inflates the bubble and then the ‘bubble pops’.
In a post on X (formerly Twitter), he recommended Andrew Ross Sorkin’s 1929 as ‘a must-read’ for investors, quoting former US President Herbert Hoover’s remark from the book: “The only problem with capitalism is capitalists. They’re too damn greedy.”
Historical Market Crashes
In his post, Kamath drew parallels between historic market crashes, from 1907 to 2008, and the current investment pattern. He draws a conclusion that in every crash the common driver has been greed.
‘1929 by @andrewrsorkin is a must-read for anyone in the markets — stocks, commodities, or crypto. He quotes US President Hoover (1929): “The only problem with capitalism is capitalists. They’re too damn greedy.” Every crash, 1907, 1929, 1987, 2001 (Dotcom), 2008 (GFC), and so many more, follows the same script. Greed drives markets higher, inflating bubbles that draw in even those who don’t understand the risks. As euphoria builds, leverage accumulates quietly somewhere in the system: loans, margins, complex derivatives. It always finds a home. This is the boom,’ explains Kamath.
The Boom and Bust Cycle
He further wrote, ‘Then comes the bust. One day, the bubble pops. The leverage unwinds with unstoppable force, amplifying losses as cascading sell-offs feed on themselves. Markets crash, fortunes evaporate, and the cycle reaches its end. In the aftermath, lessons are learned. Regulations target the specific form of leverage that caused the crisis. The mechanism gets fixed, reformed, and contained. But greed never disappears. It simply waits, then returns in a new form, finding fresh channels for leverage that no one is watching. And the cycle begins again. Different stories. Same ending.’
This phenomenon is not unique to the Indian stock market or any particular market. It is a universal truth that applies to all markets, including global markets. The greed-driven cycle of boom and bust is a recurring pattern that investors must be aware of to navigate the markets successfully.
Investor Takeaways
So, what can investors learn from Nithin Kamath’s insights? Firstly, it is essential to be aware of the greed-driven cycle of boom and bust. Investors must be cautious when the market is rising rapidly and euphoria is building. It is crucial to maintain a risk management strategy and not get caught up in the excitement of a rising market.
Secondly, investors must understand that leverage can be a double-edged sword. While it can amplify gains, it can also amplify losses. Therefore, it is vital to use leverage judiciously and with caution.
Lastly, investors must stay informed and up-to-date with market developments. Reading books like 1929 can provide valuable insights into the workings of the market and help investors make informed decisions.
Conclusion
In conclusion, Nithin Kamath’s insights on market crashes and the greed-driven cycle of boom and bust are a timely reminder for investors to be cautious and aware of the market dynamics. By understanding the historical context of market crashes and the role of greed, investors can make informed decisions and navigate the markets successfully. As the Indian stock market continues to evolve, it is essential for investors to stay informed and adapt to the changing market landscape.
