Energy stocks confused

Prices have been all over the board in the past few days, so anything we say is likely to look amazingly uninformed or downright wrong in a few days, but here goes,

Larger, more integrated companies (CVX, XOM, COP) are faring pretty well, while the more specialized drillers and processors are still struggling (HEP, EGN, EPD). All went up considerably before this week’s carnage.

And the price of oil, like many commodities and other assets, is actually going down. We’ll have final figures in our private index report post coming up, but let’s just say prices for oil were all over the map today, not to speak of the week.

This just goes to show you that it’s a losing game to try to invest on a day-to-day basis. Especially if you trade on margin. In Investopedia’s marvelously trim definition: “Buying on margin is borrowing money from a broker to purchase stock.”

The amount you borrow can vary from a small one – say borrow a dollar each to buy $10 shares. If the shares go up $3, you double your money if you sell at $12 and pay the $1 back to the broker. The margin the broker applied was 10%.

If the stock falls below a certain price, the broker “calls” on you to increase your own stake, or pay off immediately. You can see how your losses can explode quickly on days like today and yesterday. Margin buyers love volatility only if the trend is up. There are all kinds of variations on these themes that traders who consider themselves sophisticated use. We just wonder whether they make money consistently.

Of course, traders probably wonder the same thing about us buy-and-holders. What do the B&Hs do when the market tanks? They lose paper gains. They only lose actual money if they sell at prices below where they bought the shares. And if they, like IFO, are buying safe dividend payers, it scarcely matters, except in major crashes, what the prices of the shares are.

N.B. IFO has positions in all the companies mentioned above.


About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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