Are stocks worth investing in

For anyone who has looked at the stock market during the last 1 to 1 1/2 years has probably turned aghast at the extent to which stock prices have fallen. Between Jan 08 and Oct 08 the BSE index has fallen by about 64% i.e. fallen to about 1/3rd of its peak value. Many high profile so called popular stocks have been reduced to as much as 1/10th to 1/20th of their peak value. For anyone who had put in money around this time it probably has been a shattering experience and the wealth so lost might not be recoverable easily. This therefore raises a very fundamental question . Is it worthwhile to invest in stocks or are stocks suitable only for gamblers. An important question at this point could equally be how many people asked this same very question at the peak of the bull market and exited the market. If they did, then they would be, like the proverb, laughing all the way to bank.

Lets face the facts . Stock markets are not gambling dens. Stock exchanges, where stocks are traded, are public institutions where millions of people engage in buying and selling of stocks and are regulated by government. As regards other avenues of investment i.e. the traditional real estate and gold etc, well real estate also had its share of fall too. There is a property glut at present as evident from large number of unsold properties and discounts of whopping 30-40 % . Besides property has with it an attendant maintenance expenditure as also the stamp duty etc. which basically boils down to reduced return on investment. Then, not long ago, we were grumbling on measly returns on FDs . Gold did not appreciate for a considerable period . Whereas anyone who has been able to catch the bull market which started in 2003 and remained invested has succeeded in making handsome gains in spite of the downturn. It therefore appears that stocks cannot be ignored for getting above normal returns. The question can then be, if stocks cannot be ignored, do people have to loose money buying stocks.

Not if we understand how the stock market behaves. Following should explain very briefly.

Stock prices continually change, in that it keeps going up and down. Our nature is such that we always want to wait for prices to go up still further before we sell and vice versa i.e. we go on postponing the buying decision expecting prices to fall further. But this never happens in reality however much we want. And at some point the trend reverses itself and in most situations leaving no time for people to grasp what happened. And before long, gains are wiped out and losses mount. This is the greed and fear factor. All of us are prone to it. He who has conquered it is already on way to profits. Whether profits will be made depends on a few other aspects.

One is, to get an indication of whether a top or bottom is close by , for it may never be possible to catch the exact top or bottom. It is best to keep an eye on previous year high. If the prices have reached a level where it has greatly exceeded previous years high, it is time to sell. And we shouldn’t bother if prices still go up further for it will invariably come down but profits will have been captured. Look out for the frenzy in buying where people start buying all sorts of junk stocks whose prices reach abnormal levels and IPOs start flooding the market . By all means sell at these times. Getting a clue on whether a bottom is at hand is more difficult and a little risky too. While in the case of a bull market one will have made lesser profit but in the case of a bear market one stands to loose if the buying decision goes wrong and prices correct further. However few generalistions appear to work . Look out for the absolute apathy where people just don’t like stocks. The market is dull and listless and doesn’t react to any kind of news. A large number of good quality stocks record new 52 week lows . In both the extremes markets gets detached from realities of economic fundamentals and represents an aberration . This signals an imminent trend reversal.

The above illustrates when major tops and bottoms are formed in long term bull and bear cycles. A long term investment strategy focused on these cycles is more likely to generate extraordinary returns when compared to short term strategy.

Happy investing

Oil Subsidy

Some interesting statistics appeared in a recent issue of International Herald Tribune. It reads
“ Asia accounts for only about 20% of global oil consumption, but accounts for about 2/3 rd of the annual increase in global oil demand. Most of the rest of the increase comes from oil exporters like Russia, and Midle east where prices are low and economy booming. Oil consumption in the developed world is declining slowly”.

Why is this so. The answer is not far to find. “ No other region subsidizes oil like Asia” continues the article . Hard facts again - Oil subsidy in Malaysia and Indonesia this year will be around $15 bn each while India’s budget deficit , including off the books oil subsidy could be around 9% of its GDP , quoting from the article. As per International Energy Agency the total subsidy in 2008 is around $100bn twice as much as last years.

What are the implications for India. First, India being heavily dependent on oil imports, the consequences are serious indeed . Higher import bill, arising out of higher demand in a subsidised oil economy, contributes to increasing trade deficit with attendant impact on the value of Rupee which has already weakened substantially in recent past. Inflation will then be bound to rise. By subsidizing we interfere with the price discovery and end up paying unrealistic price which is bound to have an impact on the economy . For countries that are heavily dependent on oil imports such impact can be debilitating. Secondly, money allocated towards oil subsidy is at the cost of allocation to more needed sectors such as health, education and poverty alleviation where a greater proportion of the population stand to benefit .

What is therefore needed urgently is a policy to disincentivise production and use of fossil fuel. We have to encourage thrift in oil consumption in order to prepare for the eventuality of a depleted oil, a resource on which our industrial society has completely depended so far . And when that happens by and by, it will be nothing short of a shock far greater in magnitude than the oil shock of the 70’s when the world first woke up to the oil crisis. Will we be able to cope with that. Will we be able to tell our people that they have been given fuel real cheap but now they have to do without fuel.

It is here that alternative sources of fuel assume great importance . The reason why other sources of fuel have not been able to supplant petroleum is that these are yet to become commercially viable. For that to happen greater thrust in research funding is needed. Also needed is setting targets for switching over to alternatives fuel. A case in point is that a simple step as ethanol blending can go a long way in our efforts to start bringing down the demand for petroleum. Another one is biodiesel. Yet it is seen that activity in this area has slackened with the continuous fall in crude price experienced recently. Again commercial considerations come into play. Pricing aspects of sugarcane which is the source of ethanol need to be looked into so that ethanol blending is commercially attractive to oil companies. The same is true for production of biodiesel where it needs to be made attractive for investments to flow in, for, without investments in the sector very little can be done.

In the meantime improving fuel efficiency of automobiles, increasing share of railways in goods transportation and improving public transportation to wean away people from using personal transportation can be a near term actionable area.

Who is polluting the earth

There is widespread evidence that our planet is in great peril arising out of environmental degradation . The air and the oceans are slipping into an irreversible ecological disbalance which threatens to wipe out life on earth. Everyone agrees something has to be done and done urgently. And the spotlight invariably turns on industries, automobiles etc as being among the top polluters. Governments across the geographies are looking for ways to control pollution but has not been able to bring about any significant impact. We continue on our chosen path of ravaging the environment.
But why is it that in spite of concerted efforts by both developed and emerging nations on arriving at a consensus on actions to be taken, precious little could be done so far. The answer partly lies in the fact that it is we ourselves who is to be blamed for the mess we are in. How. Lets see. We are a community of wasteful and careless individuals. We are a throw away society . Consider this situation. We want to buy newer and newer models of automobiles, without giving the slightest thought on whether we really need to change the model . The number of cars and two wheelers that are junked every year, long before end of its useful life, is mindbogling. Now think about the price . The sticker price is all we tend to think of. The actual cost however far exceeds the currency paid. It starts with the mining of iron ore from which steel is made and also mining of coal which is used in the furnace. Then there is the cost of stowing the excavations. All these requires expenditure of energy adding to the carbon emission. Just to put in place, the automobile’s cost to the environment only begins with the manufacture. Once on road its a drive to continue polluting. Consider another situation. Its the area of computers and other electronic gadgets. With the phenomenal rise in computing speed, made possible by newer and newer processors older computers have disappeared. Components of these computers have found their way into some melting pot somewhere for extraction of few ingredients using questionable processes which release extremely toxic wastes into the environment. Again this is an example where something useful has been relegated to waste and replaced without thinking whether all of us really need to give up what we have. Surely most of us could , for our routine and mundane requirements, do with older equipment. By needlessly replacing our possessions we are placing a tremendous amount of strain on the environment. Then there are those needless packaging , the double packaging i.e. Most of these packaging provides little extra protection but provides extra advertisement space for the manufacturer. Why is it done that way. Because we like it that way and we haven’t given a thought on its environmental cost. Like we must have our medicine pills to be technicoloured and don’t give a thought on whether the colour was required to be manufactured at all for adding to the pill. The illustrations could go on and on.
The bottom line in all this is that we must realize that everything we buy and every product that is manufactured costs the earth something in terms of environmental degradation. We undertake most intricate budgeting exercises to be able to make our purchases, but so far as the environment is concerned we don’t pause to check the balance. And the balance is running out and running out fast. The wake up call has been given. Lets not pretend to sleep.

The not-a-millionaire slumdog

The dust appears to have settled on oscar winning film slumdog millionaire. The euphoria of many Indians making it to the coveted prize has mellowed. For a brief moment inhabitants of slums across the country had turned ectatic believing their condition would improve. Memories will soon fade . And its buisiness as usual in the slums of India. In all the applaud of the winnings at the Kodak theatre in California, we lost sight of the fact that we are home to Asia's biggest slum Dharavi Mumbai. Recently Hindustan Times carried an article citing an UN report on the plight of slumdwellers in India and blamed the condition in slums on the absense of a political vision rather than insufficient resources. The report also states that by 2030, 50% of the population will live in cities (up from 28% now) and of that 30% ill live in slums. This is a very disturbing scenario. For, as it is, our cities are bursting at the seams , with the civic amenities just not being able to cope with the demands. And with continued migration to cities, which is accelerating at a fast pace, things can only get worse .
What is the way out . Slums are where cities are. And if the everincreasing population continue to migrate to cities, slums will get bigger and bigger. So we have to make the cities bigger and if that doesn't suffice, catalyse towns to grow into cities and smaller towns to grow into bigger towns. But most importantly address the problem of why people leave villages. Let our villages have comparable facilities and with improved facilities people will have increased means of livelihood. Its the search for a livelihood that not only drives people to cities but also force them to accept subhuman conditions of living. We have no doubt made progress in this direction but it has been slow and a lot more needs to be done.