Energy rebound? Investing in the ERX?
I was just reading a book on Sir Templeton. He was a firm believer in buying at the point of maximum pessimism and buying real bargains. In an era where despite substantial negative news, most markets are trading at huge valuations, the only area for a bargain to me seems energy. I have not yet tried to look for specific energy companies to buy (my guess is that you can find many hidden gems in small caps) but I was thinking of investing 5-10% of my trading account in ERX which is a 2X levered product for energy. It was trading between $150-200 before Covid and it is now at $9. It seems to me that, there is vast asymmetric returns here. Little can drive through price more down than it is now but I can see it easily doubling and tripling, and potentially more if one has the stomach to hold on to it. What do you think? Am I being an idiot for considering this? This is very different from my usual investing style which targets growth stocks in an uptrend so although the opportunity seems amazing, my level of conviction is not that high and I am scared that greed is getting the better of me.
I think a good alternative could be to hunt for small/mid cap in oil&gas and search there. If one gets the correct stock, you could have a similar upside for far less downside. Can I have feedback on both ideas?
Bump
You arent taking into account the way the levered ETF products operate since they have daily rebalancing the replicate the ETF they track. They use options to mimic the returns and basically the 2x and 3x levered ETFs always go to zero for the same reason losing 10% and then gaining 10% does not get you back to the original value.
Investing in energy could be a good idea but don't use the reasoning that the levered ETF was previously at $150 and is now $9 as a reason to invest.
Look at TVIX, UVXY, SPXS, UCO, SCO, etc. to see how they degrade over time
Thanks for the response. What other way do you suggest then?
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