This Is How Warren Buffett Is Handling Oil Stocks and Possible Interest Rate Hikes from the Federal Reserve

Warren Buffett, who has amassed a five-decade investing track-record like none-other through his investing vehicle Berkshire Hathaway, was interviewed on television recently.

In the interview, he shared insights on how he’s investing in oil-related stocks and how he’s thinking about possible hikes in interest rates that may come from the Federal Reserve in the U.S.

Both topics are widely watched by market commentators and scores of investors around the world. A barrel of oil was being priced at more than US$100 per barrel in the middle of 2014; today, it’s at less than US$50. That sharp decline has led to difficulties for many oil & gas-related companies.

Meanwhile, the Federal Reserve, the Central Bank of the U.S., has kept interest rates at near-zero levels for years now since the Great Financial Crisis of 2007-09. With rising interest rates potentially leading to lower stock prices, it’s also no surprise that it’s an event that’s watched by many.

Buffett on oil

Here’s a transcript of the section of the aforementioned interview in which Buffett’s talking about oil stocks:

Interviewer: “You have now a 10% stake in Phillips 66 [an oil refinery]. Is it a banking on a rebound in oil prices?”

Buffett: “No. No. We have no bets on oil coming back. In the refining business, it doesn’t really make that much difference what the oil price is. We have no investment in producing-oil companies.

Interviewer: “But you like the energy business still? You love energy companies?”

Buffett: “Well we have utilities. Electric utilities. Gas utilities. I sort of separate those from oil and gas production.”

The distinction that Buffett makes here between oil production companies and oil-related companies that do not depend on where the price of oil is at is important. I’ve heard and seen far too many investors make investment decisions on oil-related companies based on what they think the price of oil is going to do.

That can be a dangerous way to invest as no one really knows where oil is going. And as Buffett also makes clear, he’s not making any predictions on oil – he’s making an investment in a company that he thinks is agnostic to the price of oil despite its place within the oil-industry value-chain.

Many oil-related companies can be found in Singapore’s stock market. Some notable ones include the rig-builders Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51). Investors who are interested in these companies need to do so for the right reason: Their belief in the companies’ ability to produce good business results wherever oil may be. Investing based on where oil is going may lead to disappointments down the road.

Buffett on the U.S. Federal Reserve

The following’s a transcript of the same interview, but of a different section in which Buffett’s talking about the Federal Reserve.

Interviewer: “Will we get one [referring to a rate hike]?”

Buffett: “I have no idea. I’ve never met Janet Yellen [the Federal Reserve Chair]. I don’t think she’d tell me if I had.”

Interviewer” “Does it matter to you either way? Do you think about your own financial holdings differently – whether it’s Wells Fargo, the warrant to buy Bank of America, or the insurance companies?”

Buffett: “I’d never give a thought to it. I’ve never bought or sold a stock, I’ve never bought or sold a company where what the Fed is doing or is likely to do entered into my calculation. And that is true of my partner Charlie Munger. Not in 50 years. And it never will.”

Interviewer: “So do you think a lot of the attention that investors are placing on the Fed is a little bit [of an] overemphasis?”

Buffett: “It’s a mistake to try and make investment decisions based on what you think the Fed is going to do. If you owned a farm, would you buy or sell it based on what you thought the Fed is going to do next week? Or if you owned a local little business… if you owned an apartment house, would you say “Maybe I had better sell it coz the Fed may do this or that?” No. You just be content owning a good income-producing asset. And American businesses have been wonderful over the years.”

Buffett points out a mistake which many investors may be committing now: Making their investment decisions based on the Federal Reserve’s actions.

For 50 years, Buffett has yet to make any investing decisions which are influenced by macro-economic factors like what the Federal Reserve is doing or going to do (and it hasn’t stopped him from producing smashing results).

In investing, what’s most important is how well the stock’s underlying business is going to do over the long-term future. And often, there can be no links between the Federal Reserve’s actions and the long-term health of a business. So, spend your time wisely – investigate and worry only about the things that truly matter.

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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 writer Chong Ser Jing owns shares in Berkshire Hathaway.