Seth Klarman - Psychology of Leadership

Energy Infrastructure - Need to look into the future

With shale oil and natural gas recoveries in various parts of the world, the future of the oil economy is already starting to change. According to the 2010 World Energy Outlook by the International Energy Agency, the world shale oil resources may be equivalent of more than 5 trillion barrels of oil of which more than 1 trillion barrels may be technically recoverable. In comparison, the world's proven conventional oil reserves are estimated to be at 1.3 trillion barrels. This means that the quantity of economically recoverable shale oil is almost equal to the amount of oil. But, the major difference is that majority of the world's shale oil deposits are in USA. In fact, the top 6 shale oil deposits discovered till date are all in the US. 


On the other hand shale gas, a natural gas which is extracted from shale rock formations, prices has crashed in the US due to excessive supply. In July, the supply is going to exceed the demand and storage capacity put together. This may mean a further crash in prices. That is why the import terminals in the US have applied for converting to export oriented ones. US has the 2nd largest shale gas reserves, after China which has the highest. Gas price in US is currently in about $2.5 per million British thermal units (mBtu). The latest figures from the U.S. Energy Information Agency (EIA) indicate that natural gas supply could exceed demand by 2016, enabling North America to become a net exporter of LNG. In India, domestic gas is sold between a price range of $4.2 and $5.65 per mBtu. Imported gas is sold for $13-14 per mBtu. The landed cost for US imported gas is likely to be much cheaper than the current rates.


Politically, US may start losing its interest in Middle Eastern politics and become a dominant energy exporter themselves. Also, this will mean that the concept of "peak oil" that was first propagated in the 1970s will lose its relevance.


From an Indian perspective, it makes sense to start building infrastructure for LNG on a larger scale. Building cars, filling stations, LNG terminals and storage tanks to power plants which run on LNG are needed. All this would take time and we should take up this challenege. Dr. manmohan Singh has expressed his desire to focus on the infrastucture sector. I would hope that this takes a high priority on his agenda, for the sake of India's future.

Balkrishna Industries - 4 prominent fund houses pick up stake

Four prominent fund houses today picked up stake in Balkrishna Industries.  Reliance Capital, SBI Mutual Fund, Prudential ICICI and Franklin Templeton bought over 47.73 lakh shares of Balkrishna Industries at a price of R240 per share. The investment by the four AMC's amounts to R114.55 Cr which is about 4.94% of the outstanding shares. ChrysCapital sold off its stake in the company by selling its 9.33% stake at Rs 240 through its subsidiary Copa Cabana. 

With the rupee losing value, BKT should continue to do well in its exports. The key risk is of course any reduction of orders from Europe which is a key market for BKT.

Using derivatives to manage portfolio volatility

This post in response to a query by Kiran on one of my previous posts. I sometimes use put options in my portfolio. Since, this is more a call on absolute levels of the market and its likely future direction, I use it sparingly.


Even when I do buy a put option, I buy a far out-of-the-money one so that I pay a low premium. Since, my portfolio is long-only, I don't need to buy call options for hedging. Also, I don't employ complicated option strategies like straddles, strangles or other such esoteric ones. My thoughts are simple, I buy puts with little premium so that if the market suddenly collapses, then I will make up for some of the loss in the stock values. And I am ready to write-off that premium if the market does not fall off the cliff.


And for this reason I use options only when we are close to a important event which has a large risk or a long term market top. So, for example, I might but a put option close to the 2014 elections or when Nifty goes to 6000.


Personally, I do not think small investors should try their hand at options. The certainty of losing money is much much higher than the possibility of making it over a period of time. It is much better to buy, hold (and pray!!) than to speculate on the future direction of the market.

Dr. Michael Burry speaks at UCLA

Dr. Michael Burry - Famous as the person who shorted his way to billions during the collapse of 2008.

BHEL - Worth Looking At?

It is a surprise, even to myself, that the last two stocks that I looked at are either PSU or state owned. (Previous one - Tide Water Oil). This week I was looking at BHEL - Bharat Heavy Electricals Ltd. I don't want to dwell on the merits and demerits of the company, it is perhaps all too well known.


It is a jewel-in-the-crown company, which basically means, it is there for the government to milk it dry before it either goes belly up or is sold to a private player!!! The company has an order book of around 1.3 lakh crores at the end of Mar 2012. It has also recently received orders from the NTPC for a super thermal power plant in Madhya Pradesh. BHEL has had trouble due to competition from China. Some of the Indian power companies have gone ahead and bought cheaper equipment from Chinese vendors, who also bundle in cheap financing. There is an expectation that the government might increase import duty or add an anti-dumping duty on power equipment, which would go a long way in boosting the company's position. Also, the government might just wake up from its slumber and order some big ticket reforms in the power area (unlikely, but possible).


On the valuation front, the stock is available at a dividend yield of over 2.8%, PE of 7.5 and a P/B of 2.0. The price of 220 is close to its 5 year low of 196 reached in 2008. The problem is with the the promoters (the government of India) - the worst promoter you can think off, so take some valuation points off for them. But still worth a look at this price. But only for a time horizon of 5 years or more. 

Fear is the Key

Murphy's Law states "If anything can go wrong it will". O'Brien's Law says " Murphy is an optimist"! But when you are beyond Murphy and O'Brien and things are so bad that you are really really scared, that is the time to buy.


I use a "gut-feeling" indicator to adding net money to my portfolio. When my gut says that I should sell everything and put the cash in fixed deposits, I brace myself and buy stocks! Usually, it is when the markets are in very bad condition and over the last 12 years that I have been investing, it has given me decent returns. As J. Paul Getty once famously said, No one can possibly achieve any real and lasting success or get rich in business by being a conformist. 


Another aspect which is healthy to inculcate is skepticism. When everyone thinks alike, everyone is likely to be wrong. These days investors seek the comfort of the herd from online forums and mailing lists. These forums tend to have some darling stocks against which it is sacrilegious to voice a negative opinion. Every one is comfortable that a vast majority of "similar" investors are doing what they are doing. The problem with such herd thinking is people tend to suspend their natural skepticism and stop questioning the basics. Most of the time, if basic common sense is applied, you can stay away from problematic stocks. 


So, the advice I give myself, is 1) never to take someone else's stock tips and 2) buy stock when I want to invest only in Fixed Deposits and vice versa.