Resist the urge to go overboard in Canadian oil stocks—but especially in junior oils, futures or options.

We think most investors should invest a portion of their portfolios in the resources sector—and that includes Canadian oil stocks. But if you do invest in those stocks, resist the urge to go overboard, particularly in high-risk oil investments such as junior oils, futures, options and so on. They are as risky as ever, and they may especially fail to thrive in a slow oil recovery.

At what appear to be historic turning points in the market, the saying “This time it’s different” is often heard—and just as often disproved. Yet the decline in oil prices that began in 2014 demonstrates that occasionally things will be different.

John Templeton, a 20th century investing master, once said, “The four most dangerous words for an investor are “This time it’s different”. What he meant was that the market goes through recurring cycles of optimism and pessimism, and that prices rise and fall in response. It’s dangerous to let yourself get caught up in a tide of optimism or pessimism and take it to mean the world has changed.

One great example is the Internet boom of the 1990s and early 2000s. Many Internet stocks rose to extraordinary heights in those days, based on the number of visits to their websites, rather than dollars in their bank accounts. Back then, lots of analysts and investors believed that “This time it’s different” and that these stocks could go on rising indefinitely. Instead, the Internet stock boom ended suddenly, like most speculative booms. Most of the top Internet stocks collapsed and brought huge losses to investors.

That’s the kind of risk Templeton had in mind when he made his famous comment about the four most dangerous words.

However, you need to remember that these four words are also easy to misapply. The underlying cycle of optimism and pessimism never disappears, but circumstances and fundamentals do change. Right now, we think many investors are misapplying the famous four words in respect to the price of oil.

Is it time to invest in Canadian oil stocks?

Many investors are reading the news intently these days, in hopes of spotting a sign that the drop in oil prices has ended. They assume that if they get in at just the right moment, they’ll be able to take advantage of another of the violent upswings that the oil market has put on in the past, after a downturn like the one now underway.

One investor wrote: “When oil dropped, I waited but not long enough. I bought $50,000 of Chevron and $40,000 of Imperial. Imperial is down about $4,000 and I have a $2,000 profit on Chevron. I’m thinking about selling the Chevron and maybe wait to see if it drops more later. I have to ride out the Imperial Oil.”

This is a bad way to invest, but especially in a volatile, worldwide market like oil, and all the more so today. It’s easy to look at a long-term history of oil prices and detect what you feel is a clear, recurring pattern. However, these patterns occur in response to supply and demand in the market, and both are constantly changing.

Oil optimists assume that demand for oil will keep on growing indefinitely, as more people around the world buy cars. Oil supply can also keep on expanding indefinitely, however, thanks to technological advances that have opened up vast new oil reserves in shale deposits around the world. Environmental regulations make it difficult to tap into these deposits in some areas, of course. Meanwhile, political turmoil in the Mideast and Venezuela make future supplies of conventional oil more erratic and uncertain.

Politics, weather and market sentiment will determine whether oil users stock up on oil, or cut down on new buying while they use up existing inventory. This can have a big impact on oil-price trends.

Investors refer to buying at a time like this as “trying to catch the bottom”. Another way to think of it is “trying to catch a falling knife”. Oil has indeed come down a long way from its peak, but even though it has rebounded somewhat from its bottom, it could drop further again. When it hits bottom, it may turn around and shoot back up again, as it has a number of times in the past. Or it may instead go sideways for months or years.

No matter how intently you read the news on Canadian oil stocks, you won’t gain any worthwhile advantage. You have too much competition. This market is simply too big and too widely traded for anybody to figure it out.

When it comes to Canadian oil stocks, it may actually be different this time

Oil shot up into the financial stratosphere in the early 1970s, partly because of political developments. Since then, its price has repeatedly gone through dramatic moves, up and down. After each plunge, prices rebounded sharply. It’s easy to assume the same kind of rebound will follow the latest plunge.

This time, however, is different. The improving technology of the past decade has opened up vast new potential oil sources. In the past, much of the world’s oil came from big underground pools, mainly concentrated in isolated areas such as the Mideast, where corrupt, volatile and backward governments were common.

The new technology produces oil from shale, a form of rock. Oil-bearing shale deposits are common and widely spread out around the world.

The new technology faces political and economic obstacles. Costs, however, are likely to fall as the new technology develops. It’s just a matter of time before oil production from shale becomes common all around the world. With oil production spread out rather than concentrated, oil prices will generally be lower and less volatile. So the inevitable recovery from the recent oil price plunge may turn out to be weaker and slower than past oil-price recoveries.

Our advice is for most investors to maintain some exposure to the oil industry as part of the Resources segment of your portfolio. Overall, though, now is a particularly good time to stick to our three-part Successful Investor approach: Invest mainly in well-established, mainly dividend-paying stocks; spread your money out across most if not all of the five main economic sectors; downplay or avoid stocks in the broker/media limelight.

Perhaps half the money you intend to invest in the Resources sector into oil and gas stocks. But only buy these or any stocks if you are prepared to hold them for at least the next several years.

Which Canadian oil stocks have you invested with in the past? Were they profitable for you? Share your experience with us in the comments.