What is making OIL boil?

The other day I was speaking to one of my friends at a major investment house based in New York. He was telling me how they had made good amounts of money in oil and that high oil prices were the best thing that could have happened for them. I jokingly hinted, "And I am assuming crashing oil prices would be the next best thing for you."

I'm sure many of you would have understood what both of us were talking about and referring to. High oil prices are not the best thing to have happened for the common Indian or common American, because they end up paying more out of their own pockets. But it is the best thing for those who bought into it a few months ago and ended up making large amounts of money running into billions of dollars.

When it comes to crude oil, a lot of the prices are not actually based on the market demand and supply situation. One reason crude oil prices are going up is because of speculation and big investment houses giving higher targets for crude. If a big investment house has some analyst coming and saying crude will touch $200, it starts creating a speculative demand. People get influenced by this and rush out and buy. It makes the buying even more aggressive if the same fund house had predicted crude crossing $120 say several months ago.

Look back in history and you will see how oil tends to boil in the short term and then correct equally fast. North America continues to have large amounts of oil and most probably they plan to make use of it once Middle East runs out of oil. At the moment I feel the rise in oil prices is not justified and in the near future they will correct. Oil demand is going to rise over time, but if oil becomes too expensive we all shall start looking at alternative sources of energy.

That is one of the reason Rakesh Jhunjhunwala invested in Praj. The other day we had a bright young gentleman telling us how he would be investing in a solar energy company due to the rising need of such energy sources over the long term. Every challenge brings and opportunity with it. As investors instead of cribbing about high oil prices and how they affect markets, we should look at opportunities which can be tapped into.

Recently I was hearing Mr. Naik of L&T and you could make out that he was very confident about the growth path ahead for companies like L&T. I suggest all of you should pay attention to their balance sheet and see how well they are doing, in case you haven't done that already. As I have always mentioned that companies which have something to do with India's domestic growth are much more secure than those who are linked to the West in any way.

L&T is a company that is doing great, but also at the same time it is quite visible to a large investor population. All those of you who have read Invest The Happionaire™ Way might be remembering my philosophy of buying into companies which are not noticed by the masses and thus being offered at a discounted price. And my other philosophy of buying into companies which benefit indirectly from growth in another sector. For example I bought into cement when everybody was constructing houses. These principles are very simple but not always easy to follow. I have learnt these from great investors like Warren Buffett, Graham, Peter Lynch and others.

I would want all of you to look at companies which will benefit by the growth taking place in L&T.

However by now we all know that as investors we don't let the markets control us and rather think like the owners of the business. The business continues to show huge potential. When it comes to such smaller companies, the thing I really like is that if things go as expected the returns can be exponential. It is very difficult to get a 4 bagger (400%) or 5 bagger (500%) returns on an established large cap.

Happy investing and learning!

- Yogesh Chabria

The author is an investor and author. You can read about him discovering multi-baggers irrespective of where the markets are, learning about investing from Bollywood movies and much more in his bestselling book Invest The Happionaire™ Way. You can find out more by visiting www.happionaire.com. You can write to him at yogesh.chabria@moneycontrol.com

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