2 Handy Warren Buffett Tips for the Current Rout in Oil Stocks

The oil and gas industry has been rife with uncertainty in the last six months with oil prices looking like this:

2015-01-27 Crude Oil

Source: Nasdaq

It is in these episodes of uncertainty that the timeless principles of investing maestro Warren Buffett might stand out.

A couple of his tips in particular could come in handy as the impact of falling oil prices has been felt within the shores of Singapore. Share prices of companies such as jack-up rig provider Ezion (SGX: 5ME), and rig builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51), have fallen in excess of 27% since the start of 2014.

With that in mind, here are a couple of Buffett’s tips to note, starting with:

Buffett first penned the words “so if you wait for the robins, spring will be over” during the depths of the Great Financial Crisis of 2008-09. Much like the crisis before, the deep uncertainty in oil prices now would likely test the courage of investors who are interested in oil and gas stocks.

Some investors may be tempted to “wait and see”. Others may be waiting for “oil prices to stabilize”. But remember Buffett’s words: If uncertainty is the one thing that is holding you back from studying oil and gas companies – well, maybe it shouldn’t be.

Instead of waiting for the cloud of uncertainty to clear on the oil and gas sector, this might be the right moment to actually start sifting through the rubble of fallen share prices in search of a bargain priced company.

As always, we might want to start with the strongest oil and gas companies around, and work our way from there. 

But HOLD ON there, partner! Before you dip your toes into the uncertain waters, keep another Buffett quote in mind: 

“Never test the depth of the water with both feet”

The cloud of uncertainty around oil prices alone is not enough reason to go “all-in” into oil and gas companies. As Buffett quips, jumping into unknown waters with both feet could leave you, the private investor, sinking deeper into uncertain waters.

That is especially true if we are new to the industry and may not know the ins and outs of the business of oil and gas. History has shown that oil prices can remain low for long periods of time, therefore deciding on a strict allocation of your own cash for oil and gas stocks may be the more prudent move. 

Furthermore, as my colleague Stanley wrote, it is much more important to pick good companies with prudent management teams than it is to bet on the direction of oil prices alone.

The bottom line is, pick good companies first.

Foolish take away

With uncertainty, often comes opportunity. The overlying investing theme would be for the Foolish investor to recognize uncertain scenarios, and act with discipline in deploying funds. If we can do that, we might find ourselves owning winning companies at bargain prices.

Do you have another Warren Buffett quote which you think is apt for the current rout in oil stocks and oil prices? Sound off below, and Fool on!  

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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.