1 Important Risk About Oil and Gas Stocks You Need to Note

Investing and risk management often goes hand in hand. Recently, investors of oil and gas companies such as rig builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) have experienced share price declines in tandem with the drop in oil prices. In this case, the risks inherent in the oil and gas industry turned up with some force to collect its dues.

Although the share price declines were swift, there are still other risks to think about beyond the operating environment in the oil and gas industry. This includes valuation risk, and individual business risks.

But there is one more risk often not spoken about, and it is an important risk that Foolish investors should take note.

Risk is personal

We may think of investing risk as the same for everyone around us. But in reality, risk differs from investor to investor. Risk is also far more personal than we care to admit.

Our level of industry knowledge differs from one another, and our past experiences often provide us with a wholly different perception of risk for the same investment as compared to others. Jason Zweig, the author of Your Money and Your Brain summarizes this succinctly:

In reality, your perception of risk is in constant flux, depending on your memories of past experiences, whether you are alone or part of a group, how familiar and controllable the risk feels to you, how it is described and what mood you happen to be in the moment.

It follows that if a knowledgeable oil and gas investor decides to commit 20% of his or her money into a collection oil and gas stocks, it does not mean that it would be a good move for us as well. Our knowledge of the oil and gas industry may not be similar, and we may be better off with allocating money for oil and gas stocks at levels in line with our own comfort levels.

In addition, the view from acclaimed value investor Mohnish Pabrai might also be worth listening to. His 19-year investing track record includes compounding his own personal wealth at annualised rate of 26%. Earlier this year, Pabrai shared his learnings from another investing maestro, Charlie Munger, on the topic of matching risk with portfolio allocation:

Charlie’s perspective was very clear. He says,“You have to do what you are comfortable doing. You cannot say that X is the answer towards the degree of concentration [% of portfolio allocation] or not,” and I think that’s the correct answer. I think that for degree of concentration and the degree that one makes a bet and all of those sorts of things. I think it’s individual and it’s situation-dependent is probably the best way to look at it, Those are probably the best ways to go about it.

In essence, we should actively gain awareness of our own knowledge levels, and size our positions in each investment in accordance to our own personal comfort level. It would make little sense to pile on oil and gas stocks simply because their prices have fallen if you’re not well-versed in them. That could result in you taking on more risk than you are ready to bear.

Foolish summary

So, the next time you are thinking of investing into a new industry where you lack familiarity and know-how, consider easing into the industry and allow yourself to build knowledge over time. As Foolish investors, our view is towards the long term, and it applies to the amount of time spent learning as well.

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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.