Investing is no different from any other endeavor in life -- sports, parenting, your job -- in that experience is the ultimate teacher. Those who gain insight from experience -- putting in the effort to get better, learning from mistakes and capitalizing on strengths -- will almost undoubtedly become better over time and enjoy the accompanying success.
Unfortunately, most investors don't allow for the experience of the stock market to help them. Case in point being buying in times of fear. Over and over again, the market has shown investors that if you buy when pessimism is at its greatest the odds are almost always in the favor of the buyer. This was the case in 2008, 2001, 1972, and the list goes on.
This was also the case in 2015 as it relates to energy stocks. Last month, I wrote about energy MLPs and the beating they had taken as the price of oil had collapsed. Names like Breitburn Energy Partners (BBEP) and Linn Energy (LINN), along with the rest of the group, were pounded so much so that the odds of above-average returns was high when oil prices started climbing. Over the past couple of weeks, the market demonstrated precisely that.
Thanks to various factors that have led to a 20% pop in the price of oil in a few weeks, shares of Breitburn are up nearly 100% in the past month. Linn has increased nearly 30%. Across the board, the tale is the same. The decline in oil led to excessive overselling of energy stocks so even the slightest advance in the price of oil has a similar effect on the upside. And when you have an instance like we had, when oil pops by 20%, the effects are magnified.
The experience to be had here is not about trading on oil's ups and downs. Rather, it's that the stock market almost always overreacts during periods of volatility. That overreaction can create some incredible buying opportunities for investors who have the conviction to act swiftly, be patient, and not be afraid of additional volatility in the interim. An investor who can use these moments of irrationality to their advantage has the simplest and most effective tool for succeeding in the stock market.
Unfortunately, most investors do the exact opposite. Fear of buying something when the price is declining and watching that price decline further prevents most from buying when the opportunity is greatest. Instead, many prefer to buy when something is on its way up out of fear of missing further upside. And in the end, we all know how that approach typically turns out: buying high to sell low. This is taking experience and not learning from mistakes, which is how most investors underperform.
Take advantage of market experience and prosper from it, not perish from it.