How NOT to invest in oil

[Posted on November 15, 2015 by Michael L. F. Slavin]

Trying to learn how to invest in oil? Before you drown yourself in nuance and finance, it might be a good idea to learn the simplest of warning signs, the reddest of flags; the signs that say an investment isn’t high-risk, high-return, but simply ‘a terrible investment’. You don’t need to know the nuance of the oil industry or the underlying technology to spot these 10 big, huge warning signs.

Here are the 10 simple signs of a future failed investment to be on the lookout for:

1. Lack of familiarity.

When someone is trying to sell you on an investment, there should be zero hesitation in their communications with you—they should know the details of the investment inside and out. On the rare occasion that you ask a question they’re not certain how to answer, they should be able to acquire one and get back to you in a reasonable time frame. A lack of this level of familiarity with the investment offered betrays a very concerning lack of attention to the investment itself. If they don’t care enough to know, it’s probably not a reasonable investment.

2. Questionable staff.

When you look into the staffing situation, are there any red flags? Histories littered with failed ventures, inconsistent industry hopping without rhyme or reason, long gaps not touched upon? Do your due diligence in looking into the names that make things happen at the company you’re looking to invest in or the firm you’re looking to invest with, or you’ll find yourself hemorrhaging money to no benefit at all.

3. History of failures.

 Of course, even stellar staff can be working at a real dud, so make sure you investigate the history of the business in question as best as you can, too. See if you can find other investors to quiz them on their experience with the opportunity, see if there are any valid complaints or issues filed against them, etc. Bad news or a few bad reviews isn’t necessarily a big red flag on this front, but if a pattern emerges, trust the trend and get out of there.

4. Ambiguity in documentation.

Paperwork involved in an oil or gas investment should be immaculate, perfectly drafted, lacking in any and all ambiguity and vagary. If there’s something you don’t understand, it shouldn’t be because it’s not clearly laid out in the documentation; if you’re told something is industry standard and means X or Y, check with an attorney or investment professional just to be certain—or at the very least do a Google search.

5. Inexperience.

Inexperience on the company’s part isn’t necessarily a sign that an investment will fail, but you probably don’t want to invest in a company that’s comprised entirely of fresh faces with limited experience with oil and/or gas investments, for obvious reasons. Perhaps those inexperienced faces turn into juggernauts within the industry, but most businesses experience growing pains you probably don’t want to be a part of.

6. Too good to be true.

For the most part, any investment too good to be true is too good to be true. If the opportunity were that great, there would be little or no need to sell anyone on it; venture capitalists, banks, etc., would be flocking to invest in the opportunity and seize the guaranteed profits. Guarantees are pretty much antithetical to the investment system, so be very alert to any opportunity that incorporates this word or any variation thereof.

7. Extreme pressure.

If someone is selling you on an investment with extremely high-pressure methods, get out of there. An investment should be a reasoned, intelligent decision based on the facts, and any worthwhile company seeking your money knows this. If someone insists that you write a check immediately or otherwise pressures you to act without taking the time to think things through at your own pace, you probably want to move on.

8. Secrets and special connections.

Any, any investment opportunity that talks about secrets, special information, special connections, etc. should be viewed with skepticism at best. Good investments aren’t built on secret information and back doors to success—good illegal investments may be, but presumably you’re not interested in investments where the ‘risk’ is prison time.

9. Opaque ‘exclusive’ opportunities.

You should also be aware of investment opportunities which seek to isolate you, bringing you behind a curtain for an ‘exclusive’ opportunity only available to ‘specially chosen investors’. This might not be an attempt at fraud, but then again it might be. And if it isn’t, you’ll still want to be extremely wary, as it’s probably a bad investment, hiding itself so deeply in the shadows. Generally speaking, this type of ‘opportunity’ is meant to get you to commit yourself before you really understand the opportunity, which is rarely worthwhile and often entirely too opaque to trust.

10. Lack of professionalism.

Any respectable opportunity to invest should be associated with a certain degree of professionalism. For the most part, if an oil and gas investment opportunity seems to be managed by frat boys instead of businessmen and attorneys, stay away from it. Marketing, contracts, communications, all should show the polish and attention to detail associated with professionals; real opportunities in the oil and gas sector don’t come with contracts filled with typos, rude representatives, etc. 

There you have it, 10 big red flags to be alert to as you learn how to invest in oil. Not every warning flag is going to turn out to be a true positive, but as a beginner you want to play it safe and learn the ropes. Take chances on inexperienced staff or unprofessional investments and the like when you’re experienced enough to spot a diamond in the rough.




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