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Hard Questions For Greedy Investors on This Oil Price Rout

By now, avid Foolish readers may be aware that we are in the midst of an oil price rout. The financial media has been heavy with the latest on the price of oil, and other related news around the globe.

This oil price rout has also caused the shares of many oil and gas companies to be battered. For instance, we have blue chips like the rig builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) falling by about 29% and 35% respectively since the start of the year. Smaller oil and gas related companies like Ezion (SGX:5ME) have seen even larger price declines of more than 43% over the same time frame. Besides the oil and gas companies, other companies have also seen a slide in share price.

The resulting slide in share prices may turn out to be an opportunity for Foolish long term investors to fish for bargains in the oil and gas space.

But before the private investor rushes out to drill for bargains, I would like to submit three hard questions for him or her to answer before any actions are taken:

1. Are you being led by cheap share prices?

At this point, Warren Buffett’s maxim of “being greedy while others are fearful” would seem to be the order of the day. That’s especially so for Foolish investors who are looking to take advantage of share price drops caused by the rout in oil prices. However, let’s keep in mind another one of Buffett’s sayings:

The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that.

Although cheaper share prices might provide a higher margin of safety, intrepid Foolish investors should take note that it is Mr. Market who is telling us that these are cheaper share prices. Not all cheap shares will be a bargain, so it’s important to keep your emotions in check even when “For Sale” signs seem to be flashing everywhere.

2. Do you have the discipline to stick to you portfolio allocation plan?

If you are interested in investing in oil and gas companies now, ask yourself this: do you have an allocation in mind on how much of your portfolio will be committed to the oil and gas shares? If not, you might want to think of setting an allocation limit.

Bargain fishing may sound like fun for the Foolish investor, but we should also remember to stick to our portfolio allocation for our “fishing limits” (how much we buy). A non-ideal scenario that could happen is for us to wake up one day and realize that 100% of our portfolio has turned into oil and gas companies. Setting a buying limit will also force you to pick the best of the bunch, and that’s a good challenge.

Also, think about deploying your cash in stages, rather than acting with undisciplined abandon at the sight of cheaper share prices. You may also refer to the portfolio guide that my fellow Fool Ser Jing shared which touched on buying in stages as the market falls.

3. If we have a major correction in the next three months, will you still have cash to act on it?

The financial media’s eyes may be on the decline in oil and gas prices, but the third question centres around keeping your portfolio available for other non-oil and gas investment opportunities which are currently not in the news. The premise is this: let’s be sure that we pay equal attention to all potential opportunities, oil and gas or not, and not become too tunnel-visioned towards oil and gas opportunities alone. The steady deployment of your own cash could keep your portfolio open towards opportunities that appear.

As the investment opportunities from the oil and gas industry become more abundant, it could also be the best time to demand the best that the industry has to offer. In other words – “don’t settle” for mediocre oil and gas companies.

A Fool’s take

As a Fool, I enjoy the occasional bargain hunting that the share markets might offer, but I have also learnt over time to maintain a steady level of discipline in the deployment of my cash at all times. The three questions above form part of my own learnings from investing during the Global Financial Crisis. Foolish investors may find this useful in their quest to beat the Straits Times Index (SGX: ^STI) for the long term.

For me, it is far more important to keep my eyes on the long term investing game and amass the right companies that come along. If the opportunities happen to appear during this oil price rout, it’s all good. If not, I will be patiently waiting for the next opportunities to come.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.