MENU

What Investors Should Really Do Given Volatile Oil Prices

The current and future price of oil has been dominating financial market discourse in recent times. And it rightly should.

Oil prices can determine the amount of discretionary income consumers spend outside of transport; big oil producing nations depend on its level to see if they fall into a budget surplus or deficit; and it has a direct impact on a big portion of the operating costs of some companies, with airlines such as Singapore Airlines Ltd. (SGX: C6L) and Tiger Airways Holdings Limited (SGX: J7X) being great examples.

But if you’re an investor, how the price of oil moves might not even be something worth fretting over. That’s because holding great businesses for the long-term, even in the face of extremely volatile oil prices, can still produce great returns for you.

What great businesses can do

At the start of 2005, oil was below US$50 per barrel. It steadily climbed to more than US$130 in the latter half of 2008 before crashing swiftly to around US$40 by the end of that year. Oil then quickly reversed course and bounced between US$90 and US$130 per barrel over the past few years before crashing again to near US$60 currently.

Throughout that upheaval in the price of oil, shares like Raffles Medical Group Ltd. (SGX: R01), Vicom Ltd (SGX: V01), and Dairy Farm International Holdings Limited (SGX: D01), simply shrugged and carried on with growing their businesses.

Oil prices and company profits

Source: S& Capital IQ; profits for the three companies are normalized with respect to their respective trailing-12-month profits as of 31 March 2005

The chart above (click for a larger image) gives a pictorial overview of what I have described earlier. With their profits climbing steadily, the trio has delivered capital gains (where dividends are not included) of 810%, 577%, and 285%, respectively, since the start of 2005.

A Fool’s take

The market-beating share price gains of the trio – the Straits Times Index (SGX: ^STI) managed to clock a return of just 60% in the same time frame – is what having a long-term focus on growing businesses can bring for an investor even in the face of extremely volatile oil prices. It’s for this reason that investors should not fret over the price of oil. Instead, investors should really just focus their time and effort on finding great businesses with years of growth ahead.

For more free investing analyses and important updates about the share market, check out the Motley Fool's weekly investing newsletter Take Stock Singapore. This free newsletter can teach you how to grow your wealth in the years ahead, so do check it out here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Raffles Medical Group.