Why Smart Investors Are Selling Oil Stocks and Buying MLPs
It is often said that a very high percentage of individuals who trade in their own investment or brokerage accounts go broke within the first year. There have been several studies affirming that, so I don’t doubt that it is true, but to me the more interesting question than whether it is true is why it might be so. If you are attempting to take on the pros and trade intraday moves, then I get it.…
Many people who trade their own accounts often end up bankrupt within the first year, and numerous studies confirm this reality. However, the more intriguing question is why this happens. Trying to outsmart the pros and make quick intraday trades is challenging due to factors such as limited order visibility, execution time, trade size, and other aspects.
Yet, swing traders who buy and sell over multi-day, week, or month-long periods face fewer disadvantages. Despite being less skilled at analyzing stock prospects and predicting moves, most individual traders still lose money consistently. The primary reason for this is that we are all wired to fail as traders. We tend to focus on the good and ignore the bad, celebrate success while being wary of failure.
To succeed, we must do the opposite - acknowledge losses and cut them quickly while not rushing to take profits. This ability to go against our instincts is crucial when selecting stocks. We often ask ourselves why to buy a stock that has fallen significantly or refuse to sell a stock that has doubled in just a few months. Logically, a recent drop should signal a buying opportunity, while a jump should indicate a sell signal.
Unfortunately, our brains don't function this way; we ignore bad things and focus on good ones, causing us to miss opportunities and hold onto profits too long. When looking at the current market, it's clear that this mentality applies to energy stocks as well. For instance, Exxon Mobil XOM and Alerian MLP ETF AMLP have different performance trends.
While energy stocks have surged, MLPs have lost ground. This is mainly due to rising interest rates, which negatively impact MLPs. Despite concerns about potential changes in the Middle East conflict, Russia-Ukraine talks, or price stabilization, the key point is that XOM and other big oil stocks are near all-time highs, while AMLP's yield is close to 8%, a historically significant level.
Although a reversion to the mean in both markets is possible, using the proceeds from selling oil stocks to buy MLPs could position us for potential future reversals. However, fighting our instincts in such situations is not easy, but it's necessary to avoid being part of the majority of failed traders.
Written by urgent.news from OilPrice's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
