The holidays are just around the corner and it’s time for a year end stock pick. As I mentioned in my first articleoil industry is under a lot of pressure and not much changed since October. That should be a flag for you and your stock pick considerations. A lot of people are having a negative outlook on the oil industry considering a 4 year low oil price which significantly impacts the market. There is nothing wrong with being worried about the current state of the oil industry, but this is where you as an investor have to avoid following the crowds and go the opposite direction. This is very hard to do because our human instincts are telling us that it is time to pull out of the oil industry just like everyone else. This particular strategy can be a bit risky (if the oil prices keep declining) or it can be very rewarding (if oil prices stabilize). The key concept is to avoid following everyone else and block the outside buzz & noise about the market, the oil industry in this case. This is one of the main ideas that Benjamin Graham, Buffet’s mentor, was known for.
Let me tell you a story. Remember Sir Isaac Newton? Pretty sharp guy if I remember correctly. Did you know that he was also an avid investor? The year is 1720 and besides hanging out under the apple tree figuring out the gravity law, Sir Isaac Newton owned shares in The South Sea Company, one of the hottest stocks in England at the time. The market was getting out of control and Sir Isaac decided to sell his shares while adding that “he could calculate the motions of heavenly bodies, but not the madness of people”. Pretty smart move. Well, that’s not the end of our story. After cashing in his $7,000 shares Sir Isaac got swept up in the new market buzz. He jumped back in and invested much more in The South Sea Company and lost $20,000 (more than $4 million in today’s money). For the rest of his life he forbade anyone to speak the words “South Sea” in his presence.
The moral of the story- do your homework. Sir Isaac was a genius when it comes to math and physics, but he failed to block off the noise around the market and do his homework. You have to know why you own certain stock and you have to understand that company’s business model. No wonder Warren Buffet doesn’t invest in Facebook, Twitter etc. He doesn’t understand their business model and he stays clear of those companies. Simple right? Not so much when everyone jumped on Facebook’s bandwagon during their IPO. So with that in mind, do your homework,study and research the company you are interested in. This one is on me. I think Whiting Petroleum is a great opportunity at the current price.
This infographic summarizes Whiting as of Q3’14(Click on the image to enlarge it). For detailed analysis on this company, check out my article that was published on Seeking Alpha.