Columns

Stocks and flows

C Gopinath | Updated on May 10, 2020 Published on May 10, 2020

Which category does your business belong to?

The oil industry is in a crisis. The world’s sea lanes are said to be filling up with oil tankers. The problem seems to be that about 100 million barrels of oil are produced per day, while only about 70 million is consumed, creating a storage problem. With storage tanks getting filled up, oil producers have to pay people to take the oil off their hands, dropping the price of crude oil into the negative territory for brief periods. The wells are slowly shutting; re-opening them won’t be easy and will drag their companies down the financial hole.

Oil is a flow business. It needs to keep flowing. You cannot stock it for too long, for it then deteriorates. Hearing of nations maintaining strategic oil reserves, I am always reminded of my mechanic who would warn me against leaving my car sitting too long. “Cars need to move,” he would hint, for that would also mean more oil sales in his gas station. “If they sit for too long, you would have sediments at the bottom of the tank, which creates other problems”. I wonder how much of those strategic oil reserves are really usable. A smart manager would keep it flowing.

Brewers are also in a flow business (we will leave it at that and not talk of the reason why rest-rooms are critical in areas where beer is consumed). Millions of kegs of beer are sitting in breweries, restaurants and pubs going stale. They have shelf lives that range from 2-4 months, depending on the variety. Unlike farmers who can dump milk in their backyards, beer cannot be dumped unless its pH value is adjusted to reduce toxicity. Milk, also a flow business, can at least be converted to milk powder, becoming a stock which then behaves differently.

Banks and airlines are other flow businesses. The successful airlines are those who do not switch off their plane’s engines but keep them flying all the time! Banks keep money moving. When it gets stuck in non-performing assets, that’s the end of the bank.

Gold is stock, even if you turn it into jewellery and make it flow on the necklines of women. The wise ones, like central banks and corrupt government officials, leave it as biscuits in their vaults. The more you isolate and keep in vaults, the more people seem to want them, causing the price to flow!

It’s no stock

And now it is time to deal with what we have always called stock — shares that we own in publicly traded corporations. The reason they were called ‘joint stock’ companies is because traders of goods got together, contributed their stock (i.e., commodities to trade), put it all in a ship and sent it around to India, which the traders controlled through the East India Company.

But it is a mistake to think of stock in companies as ‘stock’, even though my financial advisor warns me against drastic decisions on my investments, whose value has plunged. “Leave it alone and it will bounce back,” he cheerfully advises. But he doesn’t understand my theory. The share certificates may be called stock, but that is misleading. There must be a flow underneath that stock, the flow of the business activities whose share it represents. The underlying characteristics, or the sub-stratum as philosophers would say, may reveal flow or stock behaviour.

So this column inaugurates a new way for you to think about our businesses. Is it a stock or a flow? The industries that fall in each category have very different characteristics. Studying them can help us deal with fluctuations in business and the ripple (no pun intended) it creates in the flow.

The writer is a professor at Suffolk University, Boston

Published on May 10, 2020

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
  1. Comments will be moderated by The Hindu Business Line editorial team.
  2. Comments that are abusive, personal, incendiary or irrelevant cannot be published.
  3. Please write complete sentences. Do not type comments in all capital letters, or in all lower case letters, or using abbreviated text. (example: u cannot substitute for you, d is not 'the', n is not 'and').
  4. We may remove hyperlinks within comments.
  5. Please use a genuine email ID and provide your name, to avoid rejection.
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.