If you are an accredited investor, you are indeed fortunate by having reached a level of wealth that to a large extent insulates you from financial hardship. Wall Street advisors will tell you to invest a designated portion into alternative investments. At the top of the list is the opportunity to invest in oil and gas limited partnerships. Nowhere are there better opportunities for outstanding returns coupled with generous tax write-offs.
But let’s face it; even the most experienced accredited investors with ice-water for blood will rightfully be cautious when dealing with a new type of investment opportunity. They have accumulated wealth through hard work, talent and a bit of luck, and do not want to squander it. Some might even think the best protection is to hide it in the bank.
Consider, however Matthew 25: “For to everyone who has, more shall be given, and he will have an abundance; but from the one who does not have, even what he does have shall be taken away.” Good advice. We are meant to engage life; not hide from it. Your challenge is to overcome fear and apprehension of the unknown so you can determine how best to include oil & gas partnerships in your investment portfolio.
Allied Resource Partners has talked with many new oil & gas investors regarding their concerns and how best to deal with them. We would like to summarize our findings because you will find them helpful in your decision-making process. Only you can decide what is best, so please consider the following guidelines for handling the emotional aspects of investing.
The Starting Point
Your starting point is to get enough background information about oil & gas limited partnerships so you understand what are their relative advantages and disadvantages. Do this by searching the internet before talking with an investment representative from an independent oil & gas company.
When ready – or when contacted – you will be able to carry on a worthwhile conversation. Be aware that you are a prime target, so evaluate the sales rep’s approach. If they are too pushy – telling you to buy right now without learning something about you – walk away. They are not looking out for your best interests. But also realize that the ethical oil & gas independents want you to buy because it is a win for you and a win for them. They’ll be honest with you and expect the same in return because they don’t want to waste your time or theirs.
Fears to Overcome
The number one new investor fear is “making the decision to buy in”. Here are guidelines for dealing with this:
- Realize that you have enough money so you can have a portion of your assets in non-liquid investments.
- You will most likely get monthly cash income you can “put in the bank”.
- You will significantly reduce your tax bill, which means you write a smaller check payable to the government come tax time.
The second fear is that of losing all your investment. There are no guarantees, but here are guidelines for dealing with this:
- If you did lose all your money in this investment, would it really affect your lifestyle? You have more than enough via diversification in other assets and the tax write-off would cushion the worst case scenario.
- Look at this investment as an opportunity to share in the excitement of the oil patch. It is a fascinating industry.
The third fear is not knowing if now is the best time to buy in, especially today with low oil prices. No one can forecast the future price of oil, but try to remember:
- Oil prices follow a cycle, just like the overall economy.
- Smart oil & gas independents acquire leases at bargain prices when oil price is low. They also negotiate favorable drilling costs, which means you get deals at favorable prices.
- When oil price is low, the deals still make money at this level and even more when oil prices rise.
- Oil & gas partnerships are designed to pay out for many years, so you get income in all phases of the business cycle.
- Finally, recall Warren Buffet’s quote “Be greedy when others are fearful, and fearful when others are greedy”.
The fourth fear is not knowing if you are being “ripped off”. In the past, disreputable brokers and promoters would deliberately mislead the unsuspecting investor. That occurs less frequently today because of increased SEC regulations, but you need to be prudent when getting to know who you’re talking with. Dealing with others is ultimately at matter of trust; do you trust the other party? Some guidelines:
- They must consider your wants and needs first.
- They should provide a “Due Diligence” with the facts confirming they’re “for real”, not just a couple of people with phones.
- They should be able to answer your questions. If they can’t do this immediately, they should be able to research it and get back to you with the right answer.
- You must realize that there has to be a mark-up on a limited partnership in order to cover overhead and administrative costs. That is part of doing business. You simply want to be reassured that you are not being taken advantage of.
The fifth fear is your dread of reading all the documentation describing limited partnerships, the most formidable being the Private Placement Memorandum. Please remember that many of these documents must be long and complex to meet SEC rules and regulations that are meant to protect you. There is a lot of information to wade through, and even experienced investors need help. (Many investors admit they don’t read all the fine print.) So look for this:
- They should help you walk through the documentation by pointing out what is most important.
- They should provide you with a “Limited Partner Checklist” you can use to organize the important information.
- They should be able to provide you with the completed checklists and summaries so you understand how best to look at the limited partnership.
The sixth fear is regretting whatever decision you make and blaming yourself. Cognitive psychologists have terms for all sorts of self-imposed emotional fears, like buyer’s remorse or hindsight bias. Here are some guidelines:
- All decision results are clear retrospectively, but at the time you made it the future and its outcomes are never known. Remember also that if you decide not to buy in to a limited partnership, in the future you may regret this “error of omission”.
- Minimize your feelings of regret or blame by realizing they are counterfactual emotions triggered by considering alternatives to reality. Everyone has these feelings, so be aware and move on.
The seventh fear is the fear of worrying constantly about the investment. All investors spend too much time looking after their holdings. Legendary investor Peter Lynch said, “If you spend more than five minutes a day looking at stocks, you are spending four minutes too long.” Try to remember:
- What happens to oil prices and your limited partnership are out of your control. It is a waste of time to worry about what you can’t do anything about.
- Sunk costs are sunk. Realize this, learn from it and apply what you learned moving forward.
- Consider the money you spent as a purchase, not an investment. You bought into a limited partnership for the excitement of owning a tangible asset in a very exciting industry. Follow the oil patch like it’s a hobby where you can make money whether oil prices are high or low.
We at Allied hope you find our results helpful. We are providing this because we embrace the new sales and marketing paradigm:
- Business is a garden where we grow and nurture investor relationships.
All other oil & gas companies who might contact you are stuck in the old paradigm:
- Business is a war where we kill the competition and capture their customers.
Allied leads the way for oil & gas investing today: distinctive, better, investor-centered. When you are ready, please contact us for investment opportunities. Our partner-focused approach makes you top priority. We have what you want for investing in today’s oil & gas opportunities. We are here for you.