Category: Opinion

How much oil do China and India consume?

One of the most popular notions these days is that India and China are driving the oil prices. You can flip through any business channel or read any pink paper, if it talks about oil, it talks about China and India.

So I decided to check out how much oil these two countries are really consuming and what are the growth rates like. Sure enough I found the statistics on the CIA website:

https://www.cia.gov/library/publications/the-world-factbook/rankorder/2174rank.html

This link shows the total world oil consumption at 80.29 million barrels per day. The US consumes about 20.8 of those, EU 14.55, China 6.93 and India 2.43.

In percentage terms that means that US consumes 20.8%, China 6.9% and India 2.43% of oil globally. So the China and India combine; doesn’t even add up to half of what US consumes globally.

How fast should the demand have grown to warrant current prices?

The average Brent Blend price in 2006 was $64.72, in 2007 it rose to $72.96 and last week it has been 130 something. So in the last couple of years average oil price has doubled.

So looks like India and China who consume less than 10% of global oil somehow managed to double the demand for oil globally!

That is absurd, even US, which is the largest consumer of oil could not have done it.

I can do a few quick calculations and find out what is the percentage increase in demand from US, India and China that will warrant such prices. But that seems like such a waste of effort that I will skip it and google up some other figures.

Has anyone heard of Commodity funds?

The average open interest on Brent and WTI crude has risen from $22.6 billion in 2002 to $252 billion in 2008, a little more than 10 times. Compare this to the average increase of 6% in demand for oil by India over the last few years.

Which is more likely to raise the prices of oil, real demand or futures trading?

The trading in oil futures and speculation has grown at a much more rampant pace than the real demand for oil by India, China or even US (in absolute terms).

What does this mean for oil prices?

In all likelihood no one is going to do anything about speculation in oil in the near future. The reasons for this are multiple, the financial crisis that is plaguing most major institutions will be worsened if any action is taken against oil trading. Since most of these companies are involved in this speculation as well. No one in the world can afford that right now.

If the OPEC increases oil production that will be futile because we are not talking about a real shortage here, in any case the OPEC has indicated that it is not going to do that on a big scale.

It is not possible to increase oil production in other parts of the world because of the long gestation period so nothing is going to happen on that front as well.

So if speculation is not going to be stopped and real supply not increased then how will the oil prices be controlled?

Wait for the bubble to burst

We will have to wait for the speculative bubble to burst just like the Internet bubble burst. Does that mean oil prices will come down? In the short run, no but, in the longer time frame of about a couple of years to five years oil prices will have to reflect the underlying real asset value. Much like the internet stocks and any other commodity prices throughout the history of the world.

Manshu Verma

Every year Warren Buffet writes a letter to his shareholders in which he discusses the year gone by and his views and opinions about the businesses they are in, economy and investing as a whole. This letter contains pearls of wisdom from the great investor.

In the 2004 letter, Buffet briefly touched upon three primary causes because of which investors make mediocre returns from investing in the stock markets.

Buffet starts by saying that over the past 35 years American business has delivered terrific results and an investor’s return from owning the S & P Index would have been 11.2% compounded annually. To put this growth into perspective $100 invested in 1960 would have translated into $4,108 at the end of 35 years at this CAGR.

So all an investor needed to do was to buy the S & P index fund and sit back and enjoy. However this has not been the case and most investors have experiences which are nightmarish.

Buffet attributes the following three reasons for this experience:

1.High Costs. Trading frequently and getting in and out of stocks increase the brokerage costs for investors and eats into their profits. Another reason for high costs is paying excessive amounts for investment management.

2.Portfolio decisions based on tips. Many investors have the habit of investing into the markets based on tips rather than thoughtful analysis. This leads to buying stocks because of fads and getting into businesses that investors do not really understand. Very often investors do not do any analysis of the profits and revenues of the company and jump into stocks based on tips. These tips fizzle out quickly and turn into losses more frequently than is good for any investor’s health.

3.Start and stop approach to investing. This means not investing consistently and timing an entry or exit into the market which investors usually get wrong.

So investors end up buying stocks long after they have already advanced quite a bit. And in the same manner end up selling stocks long after a decline has already taken place or long period of stagnation has existed.

Buffet cautions that investors should keep in mind that excitement and expenses are enemies of investors and if an investor wants to time the market then they should try to be fearful when others are greedy and greedy only when others are fearful.

Buying an expensive soap.

Yesterday I had gone to the supermarket to buy soap for myself and found out that if your regular brand is not there, buying soap is not an easy thing to do.

All the brands looked familiar, but not familiar enough to tilt the decision in their favor. The packaging was also similar and I had no patience to read through the contents or any other such thing. So I did what any other rational consumer looking for quality would do, I bought the most expensive one on that aisle on the premise that if its expensive it’s got to be good.

This is probably one of the most common ‘rational’ irrational buying behaviors we all suffer from.

A lot of investors have the habit of tracking the daily price of a few stocks and then if they see the price of one moving up, they automatically come to a conclusion that the company is a good one.

This is quite similar to buying the expensive soap and if you can’t buy the right soap based on its high price, what are the chances of buying the right company based on its price going up?

Similarly the real value of a company is not going to change on a daily basis and if you are purchasing the stock at a higher price just because the stock has gone higher in the last few trading sessions you may be paying more than what you could have gotten if for.

Price should not determine whether a company is good or not, it should be the second level of filter that needs to be applied in order to buy the stock.

The first filter should be the fundamental strength of the company, factors like the operating history of the company, competitive landscape, profit margins, revenue growth, management caliber, availability of raw material and such determine this. After analyzing companies on such parameters and arriving at a conclusion that the stock is worth investing, the second step is to see whether the price that the market is asking for the stock is justified or not.

This is not a difficult task but it’s not an easy one too. The key is to look at the price as a function of earnings and the P/E Multiple is a good way of determining whether the stock is decently priced or not. For example if there is a company which makes an EPS of a dollar and the asking price is 55 then the market is demanding 55 times the stock’s earnings in every year. This is quite high and can only ever be justified for smaller companies in their high growth period. Such companies would be doubling revenues every two or three years and because their size is smaller it would be possible for them to achieve this feat. However to expect this from larger companies in unrealistic.

For larger well established companies the P/E should be near their growth rates over the long term or a little above it, it can be a little above it because usually larger companies with an established track record trade at a premium. They give the investors comfort of knowing that the company has been functioning for decades and will continue to do so and therefore investors do not mind paying a little extra to become stock holders for such companies.

A good way of finding value in the market is to look at big companies who have taken a hit due to one off reasons or external factors while their core business still remains strong. A lot of top rung Indian IT companies are now trading at P/E multiples lower than their historical and future predicted growth rates. While this has been caused due to slowdown in the US markets and rupee appreciation, the companies are still going strong based on their growth rates in the past few quarters of around 20% or so and therefore this may be a good time to buy into such stocks.

What investors should definitely shy away from is to look at stock prices in isolation and if the price is moving up determine that the stock is a good one.

That is the total reverse way of looking at stocks and deciding on what should go in your portfolio.

Buying a stock is like buying any other asset and if you were buying a used car you certainly wouldn’t take this approach. If you were taking this approach you would have narrowed down your options to two or three cars and then you would have been tracking prices on e-bay or some other place and based on which car is priced highest you would go ahead and buy it. If that doesn’t sound reasonable then why monitor stock prices with intent to buy what’s going up?

Manshu Verma

Not long ago I had written about when is the right time to sell, at that time the market was peaking and there were quite a few stocks that were overvalued or were at least at a price that was ‘sellable’. For investors who had sold stocks at that time, right now with the blood shed in the market there are quite a few good stocks which are trading at prices which are there all time lows and because fundamentally nothing has changed in these companies they can be bought at these prices. However if investors didn’t sell at that time then there is still time for them to sell but this time unfortunately not for the reason of booking profits as was the case when I wrote the last piece but for the purpose of cutting losses.
The key at times such as this when there are heavy falls and investors end up losing a lot of money is to sit back and take stock of your portfolio. Essentially you would be able to categorise your stocks into three categories. First category stocks would be the ones that are fundamentally sound, nothing has changed in their business model and growth projections and are companies that have been in the business for years together, these are your standard blue chips. There is absolutely no sense in getting rid of these stocks in panic. These are companies that have lasted for years and are more than likely to bounce back. The second category are mid-caps and small-caps which have also done well in the past few years but don’t have a stellar track record like the blue chips or haven’t been long enough. If these have been bought by an investor at recent times and at very high prices (high P/E multiples relative to their growth rates) you may want to look at selling these stocks and cut your losses. These stocks have a tendency to be very volatile and may dent your portfolio in a matter of a few trading sessions. However if these are stocks which have been with you for a long period of time bought at decent prices, then you may want to hold on to them if nothing in their business or money making model has fundamentally changed. One such stock in my own portfolio is Dewan Housing Finance, not exactly a blue chip but a sound company which has done well over the years and which was bought at reasonable price about an year ago. I would hold on to this stock as nothing that would affect its earning ability has changed and the stock should bounce back as sanity is restored in the market. The third category is of stocks which had been bought purely on tips and the names of which you yourself had heard for the first time and which have no financial track record only promises. Get rid of them as soon as possible and cut your losses. Buying stocks without research and only on tips is the worst thing that any investor can do and better to learn from that mistake than to hold on to such stocks and make more losses. 

There would however be sure to be a few investors who had sold stocks at that time and are sitting on some cash. They could buy some bargain picks which are going around in the market right now.

One such stock which is in my portfolio right now is Infosys which has taken quite a beating and is trading at its all time low. At P/E multiples which are lower than its own guidance for the next year and certainly much lower than the P/E that it has enjoyed in the last few years or the growth rate in the last few years. The guidance for the next year is decent, the third quarter results of most IT stocks have been good and so far there has been no specific talk of slashing IT budget even though there has been a lot said about the US recession. Given this scenario Infosys looks a decent bet right now. 

 

 

Manshu Verma
 

For most long term investors the year 2007 would have brought a lot of profits as markets globally reached all time highs and investors made loads of money. The investor confidence seems to be high and most investors are looking forward to another year of good growths and good profits. 

At the year end I glanced at my portfolio to see which are the stocks that gave me maximum profits and which were the ones that bled the portfolio while only Arvind Mills stand as a stock which bled the portfolio, there were a couple of stagnant stocks like Infosys and CREW BOS. Both these were making their earnings from exports and the rupee decline hurt them. The stellar performers were Dewan Housing Finance, Tata Steel, Tata Telecom and a few others which are all gaining from the consumption led gains in the Indian economy. 

That is where the growth seems to be for the coming year as well, with the rupee not likely to gain any time soon and the consumption cycle within the economy not likely to be reversed any time soon the growth would be in stocks which gain from the spending of rupees within the economy and not with the spending of dollars outside the country stated in very crude terms. For example a hotel in Coorg has a much better chance of doing well than a BPO unit, given that both are being managed equally well. 

So if one has to bet on stocks then one is safer with consumption led stocks and not stocks that are driven by export earnings. 

While the focus for me would be on consumption led stocks for the year going forward the stocks that are already there in the portfolio and which are export driven like Infosys would continue to hold their places there. This is because these are sound companies with strong management and a great history behind them. And such are the companies that do well in the long run. 

The best bet are companies with strong management which are in industries which benefit from the consumption led growth. Wish all of you a profitable 2008! 

Manshu Verma 

One interesting thing that I have learned in the last few days with the market boom is that growth of stocks is not linear like bonds or FDs. What that means is that while your fixed deposits will grow at a certain rate always and say will increase by 10% in six months and then another 10% in six months your stocks grow in a way which is not linear at all. Your stocks may remain stagnant for 11 months or even give negative return and then in the last month may grow by 30%. 

 

I’ve wanted to write this post for a long time but I wanted to collect some data and present it before writing it. I figure if I wait to collect that data first then will never get around to writing this post. Anyone who wants to validate this though can go to www.nseindia.com and look up any stock and then see in which months it has risen by how much percentage and they will have their answer. 

 

The point here is that many a times investors lose patience thinking that it’s been over a year since they bought the stock and there have been no returns on it and maybe it’s a wrong decision etc. However if nothing has changed fundamentally then just this is not a good enough reason to sell your stock. There is absolutely no limit to how much a stock can grow in just a few days and which it does also but most of the times after you have already sold your shares. 

 

This concept is very easy to understand however it is somehow not very easy to avoid the pitfalls that thinking along these lines brings to investors. That pitfall is holding a share for ages and then selling it just before it rises for the only reason that the stock didn’t rise in all these days. 

 

The key is to have patience and not sell only for the reason – that it is not rising. 

 

Manshu Verma 

I came across this concept of Probability vs Expectation when I was reading Nicholas Taleb’s Fooled by Randomness and he has explained it very lucidly (I do not recommend this book to anyone). Although all traders and investors know this concept intuitively, I have never seen anyone act upon it. Although I must admit that my dad was once planning to do something very close to it. 

I will take the same example as in the book, modify it a little and explain it here. Once during the author’s trading days he was asked in a meeting whether he was bullish or bearish and he said that he was bullish and a little later he said that he had shorted the market. 

These are two contradictory things and he was asked to explain himself. He said that although he did think that the market will go up, if it goes down it will go considerably down and therefore greater money is to be made from that unlikely considerable downwards movement than a likely small upward movement. 

I don’t know what the author had in mind but it is akin to being in a bull run where everyday the market moves up a little and then waking up one morning to read about the finance minister and SEBI’s outlash on PNs and the next thing you know the whole market is down 10% 

The key idea here is although the probability is greater the expectation is still lower. I myself am a long term investor and have very little faith in short term predictions of say 3 months on the market but the concept in itself is quite interesting. 

I have heard my dad telling me once that these market crashes are inevitable and every month one should buy a ‘cheap’ PUT so that when once in a year the market falls spectacularly that PUT is worth a gold mine and covers up for all the remaining 11 months when the market followed its due course. He was talking about low probability and high expectation and I think a lot of investors do think about this but not really do anything about it. 

I myself have never tried buying PUTs hoping that the market crashes and certainly do not recommend it to anyone but it is certainly a thought that is worth a thought. And while one is at it why not buy a ‘cheap’ Call as well just to take care of the ridiculous 1000 points upward moves too! 

Manshu Verma 

You may also be interested in: 

When is the right time to sell? 

The trouble with buying low! 

Of Exchange Rates, Interest Rates and Inflation 

Yen Carry Trade 

Surya Food and Agro Limited IPO 

Jhaveri Flexo India Ltd. IPO 

There is an adage in Dalal Street which goes – “regret after selling and not after buying”.

 

Many a times you would see investors who have sold stocks at profit however as soon as they sold their shares, the share went up another 10% in a matter of days.  Hence the investor rather than basking in profits is brooding about the loss in profits that he could make if he had waited for a few more days.

 

Wisdom says this is better than buying a stock and then repenting because it goes down 10% after a few hours of your purchase, which incidentally occurs more number of times than is good for any honest tax paying citizen’s metabolism.  
With the market scaling all time highs and that too bouncing back in a really short time and being as volatile as it is today, one can rest assured that the stocks which have gone up will go down as well and its best to book profits at least to some extent so that if the market goes down your profits do not vanish away completely and at the same time if the market goes further up you are not just sitting on the sidelines and watching the value of the stock that you ‘once owned’ go up.

 

For a long term investor it important not to rush while selling, and there isn’t a need to book profits out of all stocks that you hold in your portfolio. If you have been patient enough and have bought and kept stocks for over a couple of years, chances are that at least one or two of them are bringing you excess of 100% returns.  In all probability one of these stocks would be overvalued as well, because of the general atmosphere that exists in a bull run, another great plus is that if you own stock for over one year it comes under a long term investment and no tax need to be paid for the capital gains from such appreciation.

 

Therefore a combination of these three factors – 1. One of the stocks which are bringing in the greatest return in your portfolio, 2. Stock priced more than what you think should be the fair value and 3. Stock owned for over a year give a good yardstick to sell.

 

If you are holding a stock for a fairly long term you would have a good idea on what its worth is but as a general and quick guideline if the P/E exceeds the growth rate considerably then you can look at booking some profits in the stock.

 

There is no sure shot way of either predicting the bottom or the top when one is dealing with the markets the best one can do is over a long term stick to some sort of game-plan which brings more profits than would have accrued if the investor had just invested in fixed deposits or bonds.

Manshu Verma

You may also be interested in:

The trouble with buying low!
When will the markets bottom out?
Of Exchange Rates, Interest Rates and Inflation
Yen Carry Trade
Jhaveri Flexo India Ltd. – IPO
 

The trouble with buying any stock low is just that – the stock is low. Many a times I have looked at a stock which is at its ‘year high’ and wished that I would have bought it at its ‘year low’. However when it came to its year low all I could think is what went wrong! 

This kind of emotion is the biggest barrier to value investing. It becomes quite difficult for an investor to buy into a stock when everyone else is selling. But that is the oldest maxim on Dalal Street – Buy when everyone else sells, and sell everyone else buys! 

I have personally gone ahead and bought a stock which is at its annual low when the markets are scaling all time highs! (which is the trigger for this article too) The stock in question is Crew BOS a leather accessories export company from India which I had been buying from a long time and when it had reached 293 some time ago, was wishing that I had bought it at 93 which was its yearly low. 

Last week I bought this at 95 and while there have been many stocks that have found their place in my portfolio when they were low none of them were at their yearly lows when the market was at its all time highs and that’s why the apprehension. 

Being a company that is involved in exports the rupee appreciation has hurt it, but at a P/E multiple of just over 5 this stocks looks like a great bargain now. Even if it were to take a substantial hit over the next few quarters because of the appreciating rupee, over a longer term (2 -3 years) there is a very good chance of it rebounding. The diluted EPS for last year was 16.97 and at a P/E of 10 which is not very ambitious the stock would be priced at 170. 

If one is a long term investor, one has the luxury of time on one’s side and can wait for the tide to turn. The rationale behind CREW BOS is that if any time in the next three years it reaches Rs.160 which is just 10 bucks lower than its present 10 P/E price that would earn a cool 30% CAGR which is enough for any investment. When one thinks about a company with a turnover of Rs.186 crores last fiscal then the chance of its stock touching 160 from 95 in the next three years doesn’t sound all that far fetched. 

Whether this happens or not only time will tell, but for value investors it is important to sometimes ignore the market wave or rather benefit from it and buy into stocks when no one else is doing and take advantage of the anomalies in pricing that are sometimes the nature of the markets. 

Manshu Verma  October 26, 2007 

It’s amazing that there is no end to the yearly sell offs and the subsequent rise in the stock markets. Every year at least once the stock markets fall spectacularly leading most to believe that there is no bottom and we are in a bear run now, and then slowly recovers to remind everyone that we are in the middle of a bull run.

The reasons for this year’s sell offs are quite different from last years, this year it is the nuclear deal with US, threatening a change in the government at the centre as well as global uncertainties and hedge funds selling off in the Indian market.

What is same however is a lingering sense of confidence that everything will again return to normal and we will soon see the end of the volatility and would know that the markets have bottomed out. This is because essentially nothing has changed, the economy continues to grow with all sectors contributing, inflation is under reasonable check, we have strong forex reserves which keeps us from worrying on that account.

So what I am waiting for is the markets to bottom out. So far a sure sign of knowing that the markets have bottomed out is that it stops moving violently upwards. Till the time there are upward movements in excess of 200 points or so in the Sensex one can be rest assured that the market will go down also and that too more violently. However when the market starts slowly climbing up in 30s and 40s over one day that is when one can be assured that the worst is behind you. Typically this also happens after a few very violent downturns in which the market has fallen 5% or more in a single day. In the short run the volatility remains with a lot of wild swings which leads one to believe that the worst is not over and that there is still some downside left. However every downturn may be a good time to start buying and you need to target your stocks and start accumulating at every downturn. It might be very difficult to judge when exactly the market bottoms out if not impossible so start accumulating stocks which have been fundamentally good, but have bled simply because of the market downturn and then wait patiently. For patience is the key in this market and wait for the time when the commentators on CNBC once again declare that we are in a bull run!

Manshu Verma