Do you buy stocks like you buy your groceries?

Dec 24, 2010

In this issue:
» Black gold emulating its yellow counterpart
» A new chapter in land acquisition
» MFI story seems to have more skeletons
» Are PSU IPOs more lucrative?
» ...and more!!

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Have you analyzed your behavior when you buy groceries versus that while buying perfumes? In the former, you would look for the best quality at the cheapest price. You would at times even go the extent of deferring your purchase to ensure that you buy the items when they are available cheap. But when it comes to perfumes, the desire for quality overrides that for a better price. Also if you find the desired brand to be expensive, you might try to rationalize it with better reputation. Now, which of these behavior resembles your attitude while buying stocks? If it is the latter, probably you need to have a rethink.

Legendry value investor Benjamin Graham advised investors to liken buying stocks to buying groceries as against buying perfumes. Such an advice served to caution investors against the herd mentality of over paying for a desire. We believe Ben Graham was very right here! Investments serve the purpose of increasing our wealth. The returns on the same should comfortably exceed the rate of inflation. Hence, the necessity to be cautious on the price that one is paying for it is more pronounced. So the next time you refuse to pay a high price to your neighbouring vendor hoarding up the groceries, think about the FIIs. They too are hoarding up your desired stocks hoping to sell them to you at an expensive price.

 Chart of the day
As oil prices firm up and the producing nations refuse to show any willingness to increase production, importers of the commodity need to get ready for higher payouts. Amongst the largest and fastest growing economies, India is most vulnerable to the risk of higher oil prices. As today's chart shows, India has the highest crude oil import to consumption ratio amongst its emerging peers. Russia barely imports any. To top it, India's current account balance could have a gaping hole with the oil imports getting dearer.

Data source: CIA

The black gold is in some serious mood to emulate its original, yellow counterpart. We are talking about crude oil. Prices are holding steady above US$ 90 per barrel, close to their two year peaks. And if the recent trends are any indication, it won't be long before the US$ 100 levels are breached. Some members of the OPEC are already salivating at the prospect. And given their reputation for being reactive rather than proactive, still higher oil prices is indeed a very strong possibility now.

Factors like speculation, unusually cold winter, economic recovery in the developed world and the weakness of the dollar, are also not helping matters either. We are not sure whether current prices are reflective of the intrinsic value of the commodity. In view of the various push factors acting in its favour, we think the intrinsic value is somewhat lower than the current prices. But one thing is sure. Current oil reserves are indeed depleting and with demand from China and India on the rise, a slow and steady upward trajectory for oil prices is perhaps a foregone conclusion now. What would hurt though are the wild intermittent gyrations as is the case currently.

Rights of the local inhabitants have led to many a project being shelved in the country. Locals were the biggest party poopers for the Tatas in their Nano project in West Bengal, who suffered major losses for relocating the plant. The locals have also voiced their annoyance at Posco's proposed steel project in Orissa. They claim that the project violates the rights of communities residing in the area. Time and again, interests of the local communities have resulted in the discontinuation of key projects in the country. Therefore, it comes as a surprise that it is the same rural community that has come to the aid of another corporate house. HCC's ambitious Lavasa project in Maharashtra has received support from the villagers who own the land on which the project is being carried out.

These people have supported the firm's development work in the region. The project was halted in November by the environmental ministry on grounds of a complaint by an NGO stating that the company had violated the rights of the locals in the area. Well, we wonder who is right in this case. The people's voice, the ministry, which claims that the rights of the locals are violated. Or the people themselves who feel that the development in the region is good. But the key point is that a popular myth has been broken. Locals are not always averse to development.

It has been around 35 years since Muhammad Yunus pioneered the concept of microfinance in Bangladesh. He started off with a US$ 27 loan to some poor women. It is now a multi-billion dollar industry across 100 countries. In 2006, he went on to win the Nobel Peace Prize. This honor was for his work on the upliftment of the poor in his country. But now, an expose by a Norwegian documentary is threatening his life's work. The report claims that he misappropriated nearly US$ 100 m in aid money. Yunus however denies the claims. But, the Bangladeshi government now plans to appoint a high-powered committee to investigate the alleged irregularities. With this high profile industry under the media scanner, even the high lords of the industry are no longer safe. After the SKS debacle, we donít know how many more skeletons will come out of this closet.

IPO issues are looked upon with lots of suspicion by the investor community. First, they tend to be highly priced. Second, they are issued at a time when the sentiments in the stockmarkets are very bullish. But there has emerged an interesting observation with respect to 243 IPOs that have come out between 2001 and 2009. And it is that the IPOs of state owned companies have rewarded shareholders with stronger returns as compared to those issued by private companies. One reason could be that investment bankers are under more pressure to grab business from private companies and so tend to price the issues higher. Other reason could be that most state owned companies have ample cash on their books. And so the IPO is more a means to offload the promoters i.e. the Government's stake. Thus, since they want active shareholder participation, the valuations tend to be reasonable. Not so with private companies, many of them who go public because they need funds either for projects or to retire debt. Either ways, we believe that investment in IPOs should be done the way you do for already listed scrips; not only should the fundamentals be strong, but the price also has to be right.

Do you like the idea of the biggest industrial houses in the country running their own banks? The RBI has been contemplating extending banking licences to industrial houses in the country for some time now. While the NBFCs are keen, banks are not in favour of the proposal. Of course, for very obvious reasons. They fear that this could lead to a lot of connected lending. They dread that the large capital buffer available to banks sponsored by business houses would create an uneven playing field.

Allowing industrial players entry into the banking space can be fraught with risks. India already has a concentrated wealth structure which influences political decisions. Allowing industrial houses to own banks will only intensify that further. However, as an experiment, a couple of industrial houses could be allowed to own restricted small banks. The future moves should be based on this experience.

Led by strength in commodity and capital goods stocks, the Indian indices managed to make inroads into the positive territory in the latter half of the session today. The BSE-Sensex was trading 78 points higher at the time of writing this. The mid and small cap indices were up 0.1% and 0.3% respectively. The Indian indices were amongst the few gainers in Asia with most other indices closing lower. The European markets were shut today.

 Weekend investing mantra
"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." - Warren Buffett

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8 Responses to "Do you buy stocks like you buy your groceries?"


Dec 30, 2010

If companies willing to do some dream projects by the acquisition of lands belongs to locals should comply minimum requirement.
1. co's those acquiring lands must be ready to give a reasonable price for the land owners.
2. co's should ensure the proper re-habilitation of the villagers, and co's should undertake this expenses.
3. at least two member of the family should be offered a permanant job by the co's.

Like (1)

C K Vaidya

Dec 26, 2010

The stay on Lavasa construction was sought mainly for the several acts of omission and commission by the company, the main omission being the absence of environmaental clearance.
Support for Lavasa should not come as a surprise for all those who are aware of the manipulations done by politicians who have admitted to having had financial interest in the project. We should not be taken in by such support but investigate who is funding the so-called local supporters' legal and other expenses.

Like (1)


Dec 25, 2010

The issue of land acquisition for construction of factories, the recent hot topic is about the land acquisition at Peramballur near Trichy by Scam Raja's deputy Sadhik Basha. The acquired land, according to the local farmers, was done forcibly, for a leading chennai company.

Like (1)


Dec 25, 2010

Absolutely no sense currently to allow industrial houses to own banks in india.industrial houses would manipulate many things ; if i remember houses like tatas etc owned banks and got nationalised in 70s.

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Dec 25, 2010

how are you sure the locals are not manipulated by HCC.PR activity man these are very aggressive in this country these days

Like (1)


Dec 24, 2010

You are providing good sources of investment Knowledge and I very well appreciated it. Keep it up.

Like (1)


Dec 24, 2010

i like buying stocks.

Like (1)


Dec 24, 2010

The investing mantra has been wrongly attributed to Warren Buffett. This is one of the best known lines of Benjamin Graham.

Why such an egregious error? We definitely expect a high level of accuracy from you.

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