Two reasons why energy investors could be in for a NASTY surprise

It’s easy to get caught up in a spiral of fear when markets are volatile. When you’re bombarded from all sides with news that things are looking dire, it’s easy to think… that things really are dire.

But they’re not. And they won’t be. If they do get worse, it won’t be forever. And it’s in bear markets and recessions that real wealth is made.

Making real wealth in dark days

That’s why we are optimistic about the direction of the stock market, the crypto market… and, in fact, pretty much all markets in the long run.

In markets that punish high-growth, forward-looking companies, the risk on such stocks tends to be significantly elevated.

This explains why, when you take a look at your portfolios and see several stocks deeply in the red, your initial instinct might be to hit the Sell button and stem the bleeding.

Don’t do that.

We’re of the view that real wealth is created in volatile, fear-driven markets like these, so long as you keep investing prudently and manage your risk tolerance and strategy.

It can be hard to see how some stocks come out of a market that has seen values peel off to such a degree. But if you just have a quick look back through periods of market turmoil, you find plenty of examples of chances to buy low and sell high.

Let’s look at some examples that show how you can be on a paper loss to start with and still emerge strongly the other end.

Some hard – and surprisingly positive – numbers

ConocoPhillips, one of the world’s largest crude oil producers, lost 60% of its value between 17 January and 19 March 2020. It’s now trading around a 300% gain from its March 2020 low.

Pharmaceutical giant Novavax surged from $6.31 on 7 February 2020 to $290.18 around a year later, reflecting a whopping 4,498% gain. Worth noting here, though, is that Novavax is now around the same price it was in March 2020.

Closer to home and in late 2020, BP Plc was in the doldrums and trading under 200 pence.  About a year and half earlier it had been over 550 pence. That massive fall from grace produced a price drop of 63%.

While it might not have fully recovered to 550 pence today, it’s well on the way. From being at 472 pence, it’s now up 132% within a two-year period – not to mention the payment of a healthy dividend too.

We use these as examples because they show that while you can never perfectly time the market, you can certainly adopt contrarian thinking during market crises, put a little risk capital on the table and end up doing very well.

Ignore the voice in your head

When the market is full of fear and that voice in your head is saying get out, sell, sell, sell, perhaps you should be doing the exact opposite?

It stands to reason that companies and stock markets do recover after setbacks, and sometimes with flying colours. As one would expect, economies grow over time. There are also advancements in technology, population expansions and other positive macroeconomic and demographic factors.

So, the major companies that are involved this growth will inevitably increase in size, too.

A closer look at the FTSE 100 over the past 20 years reflects this.

Source: Koyfin

You can see the major pullbacks during the financial crisis of 2008 and the pandemic in 2020. After this, an upward trajectory is resumed.

The current bear market pullback has already started. How long it will last is anyone’s guess. It could be months. It could be years.

Some companies won’t survive. Some will. Above all else, we think that the smart way to play it is to see a crisis as an opportunity.

Until next time,

Sam Volkering
Co-editor, Exponential Investor