What Does Delhi's Odd-Even Rule Tell You About Stocks? - The 5 Minute WrapUp by Equitymaster
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What Does Delhi's Odd-Even Rule Tell You About Stocks?

Jan 2, 2016

In this issue:
» Reason to be worried about food inflation
» Recency bias towards oil and gas stocks
» Update on the markets
» ....and more!
Tanushree Banerjee, Co-Head of Research

Being a Delhiite is not going to be easy. For the next fortnight at least.

Every alternate day may be a struggle to get from one place to another. Especially to one's workplace.

The experiment to allow cars having odd-even number plates on alternate days may be great from social perspective. It may help reduce both traffic and pollution over time. For most Delhiites it may be about getting accustomed to a mode of transport they are simply not used to - public transport. Even those using radio taxis and car pools may have to get used to being without the comfort of their own vehicles. Nevertheless, both these challenges may eventually fade away.

The risk that is being under rated is the economic impact of this necessary social revolution. Fewer cars on the road is an ideal scenario for a growing metropolis. However, companies hoping to sell more cars in the metropolis have a huge roadblock to overcome.

Passenger car makers cite the low per capita ownership of cars in urban India as the rationale for their growth. Comparison with China, in particular, makes the double digit growth rate seem feasible. But it is very likely that India's policy makers will take more steps to prevent cities from becoming gas chambers like Beijing. In other words, the most popular car makers could see their sales drop year on year, in volume terms.

Now it's hardly certain whether the Delhi experiment will be successful. Nor do we know if other metros will want to emulate it. But such government and regulatory actions should be an eye opener for investors.

Investors often assume the pipeline of new product launches as the sign of future growth rates. Mere announcement of new brands and models fetch higher premium for stocks of large auto makers.

What is important to check is if the management of the company has foresight to mould the business model to overcome long term risks. Environmental concerns have always been a threat to auto makers. Wider use of public transport can also be a meaningful risk. But very few companies are doing enough to rise up to the challenge.

It may now be wiser to not assume growth from such product diversity for granted. In fact it may be even wiser to not take growth and profitability of large profitable companies for granted.

Do you take the growth and profitability of well-known businesses for granted? Let us know your comments or share your views in the Equitymaster Club.

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2.10 Chart of the day

Indian agriculture continues to suffer the brunt of poor productivity. Other than the economic factors such as government policies, infrastructure, land and labour laws, technology and others, physical factors too impact the output. This largely involves disruptions caused due to weather shocks. Today's chart of the day highlights the loss in the output owing to unfavorable climatic conditions.

The beginning of 2015, demonstrated moderation in inflation , however the same has come under pressures since last few months.

The things may further worsen if the food production cannot keep pace with growing population. We will be doomed to suffer from rising food prices anytime soon. Thus, if you are not already worried about food inflation and India's food security, the current trends may make you start doing that.

How the weather is affecting farm productivity


The new year has certainly begun on a good note for Indian gas companies.

While in the year gone by oil and gas prices almost halved, India Inc was hesitant to use long term gas since the pricing was as per a long term contract, almost double the spot price. Indeed a matter of concern, not just for the biggest importer Petronet LNG, but for companies like GAIL that had signed back to back gas offtake agreements.

Keeping in mind the macro realities, Ras Gas, Qatar has waived off take or pay liability worth Rs 120 bn. And that not all! It has cut gas price to almost half, from original US$ 12-US$13. This certainly removes a key overhang for such stocks. But does it do anything to boost prospects from here?

A look at Petronet's stock price reaction to such events may suggest it does. The stock is currently trading at life time high!

This reminds us of recency bias - the tendency to think that what has happened in the recent past will continue in the future, and giving more weightage to recent events than overall picture while forming an opinion. Needless to say, business and macro economy hardly work that way. And decisions based on wrong premises are unlikely to yield great results.

As Benjamin Graham has said

  • In the short term the market is a popularity contest; in the long term it is a weighing machine.

While one must factor in ongoing developments, make sure to not ignore the overall picture. Last but not the least, never compromise on the margin of safety while taking investing decisions.


Majority of the global markets ended the week on a sombre note. The US markets were the biggest losers down by 2% on weak macroeconomic data. While the weekly jobless claims rose sharply since February, the Chicago Purchasing Manager's Index plunged to its lowest level since July 2009 at 42.9 in December. A level below 50 denotes contraction.

The Chinese market was also down 2% on account of contraction in the manufacturing sector for the fifth month in a row in December. Even European markets remained subdued with France registering a dip of 0.5%. Weak commodity prices and concerns of slowdown in China, the major consumer of commodities, continued to weigh down the indices in these markets.

However among Asian indices, the Japanese index was up by 1.3% driven by a weaker yen as well as Bank of Japan's asset purchases. Even the Indian markets managed to end the week higher by 1.2%. Barring IT stocks that remained flat, all the sectoral indices ended the week in the green. Realty, Power and Auto sectors were the biggest gainers for the week.

Performance during the week ended 1st January, 2016

4.50 Weekend investing mantra

"You have to segregate businesses you can understand and reasonably predict from those you don't understand and can't reasonably predict. An example is chewing gum versus software - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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