Energy stoks for 2011

Some investors buy clean energy stocks because it's the right thing to do, others because we know that the diminishing availability and increasing environmental impacts of traditional fuels will eventually force society to adopt more sustainable solutions. Cartoonist Scott Adams says we're all wrong, and we should invest in companies we hate.

Although Adams' column is meant to amuse, rather than serve as investment advice, it's funny because he touches on two very important truths about investing.

1. Although a few investors can outperform the market over the long run, the vast majority can't, and no one consistently produces superior results, year in and year out.  (One exception was Bernie Madoff, who was known for his unusually steady returns. We all know how that ended.)
2. Investing because it makes you feel good is a fairly reliable way to get into trouble in the stock market.  If you are buying a stock because it makes you feel good, you're probably not alone.  All those investors buying to make themselves feel good are probably driving the stock price up beyond what the company is worth, which will mean a long term drag on returns.

Both those truths are on display as I look back on the first half performance of my annuallist of ten clean energy stocks.  After three years in a row of outperforming my clean energy benchmark, my winning streak seems likely to end in 2011.  So far this year, my benchmark PowerShares Clean Energy (PBW) ETF is down 13.4% for the year, while my ten picks are down considerably more, at 25.2%.  Meanwhile, the broad market was up 5.2%, as reflected in the Russell 2000 index.

The pattern of losses, while in part due to bad luck, also comes from ignoring principle #2: I included too many stocks I liked, despite the fact that they were fairly expensive on conventional measures.  

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