Earlier this week, Saudi Arabia and Iran had met and failed to come to an agreement to cut their output of oil. Oil prices promptly fell.
But yesterday, OPEC (Organisation of the Petroleum Exporting Countries) members agreed to shave their oil production levels from November onward. Oil prices promptly spiked. What a world of difference a few days can make in the sphere of oi prices.
This reminds me of the difference between trading and investing.
If I were an oil trader and I had made a bet based on my assumption that OPEC would agree to a production cut, I would be right – but I would still be speculating.
After all, I could easily be wrong with my prediction. Not even OPEC members can know with certainty what the conclusion of their discussions will be before they entered the meeting – in fact, that’s why a meeting was needed to discuss this issue in the first place.
But if I were an investor and I’m looking at an oil & gas-related company such as oil rig builder Sembcorp Marine Ltd (SGX: S51), I would look at its historical business performance, its current financials, and think about its business going forward. I would consider the company’s future under three scenarios: (1) Oil prices recover; (2) oil prices stagnate; and (3) oil prices fall yet further.
Take a look at the different thought processes of the trader and investor. The concerns of the trader and the investor are very different. One is focused on a short-term event (OPEC members’ decision tomorrow) and one is thinking about the long-term future of a company under different scenarios.
Moreover, bear in mind that a trader is likely looking at events on a very short time horizon, so he or she may need to make many decisions in a day. An investor on the other hand, can look for only a few companies that he or she is confident in and invest in them for years.
It can be more exciting to be a trader. But, the investor would more likely be able to sleep better at night, regardless of how oil prices move.
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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 Stanley Lim doesn’t own shares in any companies mentioned.