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1 Key Investing Lesson for 2015

The current year is winding down.

It may be a good time to reflect on the happenings in the world of finance in 2015 and pick out lessons that we can take away from it. There have been a few notable events this year, like the fall in oil prices and the depreciation of the Chinese yuan. Coming to home, Singapore’s market barometer, the Straits Times Index (SGX: ^STI), is currently 16% lower compared to the end of 2014.

Here’s one lesson that we can learn from all this.

The oil and gas massacre

The price of oil, as shown in the graph below, has endured a harrowing 18 months. At the moment, a barrel of the energy-giving commodity is sitting near the US$40 mark after another round of declines over the past quarter.

2015-12-14 Oil Prices

Source: NADAQ

Companies related to the oil and gas industry have not been spared. We can use the experience of bellwethers like Keppel Corporation Limited (SGX: BN4) and SembCorp Marine Ltd (SGX: S51) as examples.

The two companies, which are part of the 30 components of the Straits Times Index, have seen their share prices decline by 28% and 50%, respectively, since the start of the year. This market performance has come on the back of their generally weaker revenues and earnings.

The downturn highlights some of the risks of investing in a cyclical industry.

Keppel Corporation’s revenue for its offshore and marine business segment, for instance, has fluctuated between a low of $5.6 billion to a high of $8.6 billion between 2009 and 2014.

image

Source: Keppel Corporation’s earnings announcements

It’s not to say that we have to time our moves in and out of the industry perfectly as that’s something that is incredibly hard to do – even experts in the field have not been able to predict the fall in oil prices with any precision.

Instead, developing an awareness of the potential risks may be a better approach. After all, the aforementioned companies have experienced volatile revenues in the past. As such, one possible ‘better-approach’ would be to seek a higher margin of safety when it comes to the oil and gas industries.

Foolish takeaway

Learning lessons helps us improve our investment process.

In my view, a good investment process involves thinking about the potential upside as well as potential downside of a company. In the case above, the oil and gas massacre helps us think through the potential downsides of a cyclical industry.

Picking up lessons like these helps us sharpen our investment thought-process and hopefully, become better investors.

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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.