I can’t resist sharing this cartoon. Funny!
The kid with the taser sums up my confrontational attitude towards investment risks, particularly when it comes to highly volatile investments such as oil. I like to use shock and awe (excuse the pun), overwhelming power, to wrestle investment risks to manageable levels.
To start. No investment is without its risks. However, knowing that there are risks is one way of avoiding their consequences.
Let’s take a look at the key risks inherent to investing in oil stocks. First, I should give you some insight into my perception of investment risk.
Sleeping Like a Baby: My Risk Tolerance Test
I am a soldier at the core, having served overseas, so I’d say I have a pretty heightened perception of risk. In the profession risks are called threats. Physical threats and threats to the mission. Identifying, assessing, mitigating and monitoring threats/risks is performed on a continuous basis. I believe my service has made me a much, much better investor.
As a straight forward value investor my view of investment risks are pretty simple. Investment risks are the threats to my portfolio’s performance and returns.
When looking at an investment, I’m mindful not to be blinded by the potential returns so as to overlook the potential downsides. As a result, I systematically analyze all the known risks.
I try to asymmetrically reduce my exposure to those risks relative to the anticipated return to the extent that I am “comfortable” with the actual investment.
And by being “comfortable” I mean to be able to sleep well at night, not constantly on a stock monitoring app or anxiously staring at a computer screen. Investing should be fun and not stressful.
So, when investing in stocks I’ve found it essential to fully confront the risks of the particular investment and the impact they may have on my overall portfolio. By confronting risks up front I prepare for possible negative events, including volatile markets, and THAT increases my “comfort” level.
I’ll follow up this article with a much broader one on the subject of risk; how the rules I follow when investing in the stock market mitigates and manages my exposure to investment risk.
My Top 3 Key Investment Risks with Oil Stocks
Investing in oil stocks carry their own special categories of risks depending on the type of investments. And folks there are a lot of associated risks.
Here is the short list. Market risk, geological risk, volatility risk, business risk, depletion risk, liquidity risk, concentration risk, political/social/legislative risk, default risk, seasonality risk, mechanical risk, environmental liability risk, currency risk, price risk, third party risk, storage risk…
Any and all of these risks by themselves or in combination can tank your investment.
Based on my portfolio, investing style and the investing strategies I use I try to reduce the impact of an occurrence of these biggies.
Meeting of the Minds
I hope you enjoyed this post. Are these the same types of investment risks that you’ve identified while investing in oil stocks?