As with any theme investing, consider clean energy stocks very carefully before you dive in
Some investors go through a phase when they know just enough about a particular investment to be a danger to themselves and others.
All investments come with a mix of risk and potential reward, including clean energy stocks. The greatest danger comes when you understand the mechanics of an investment, but you’re missing some of the details. Your understanding of the potential reward can make you greedy, while the gaps in your knowledge limit your natural, healthy sense of skepticism.
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Theme investing has wide investment appeal, simply because the association with a particular investment theme seems to make profit easier to come by, if not inevitable.
For example, many investors have asked about investments that tap the global economy’s growing need for clean water. A number of companies qualify as potential water investments. But many labour under major drawbacks such as a need to deal with troublesome and corrupt bureaucracies in countries most in need of clean water. Some also lack of significant profit prospects and have insiders whose real talent is stock promotion rather than water investment.
(It’s easy to launch a stock promotion that taps into a popular investment theme. It’s much harder to launch a successful, profitable business, and that’s why most stock promoters fail at it.)
Themes like clean energy stocks can cause you to overlook crucial details
A key problem is that if the theme is your overriding investment consideration, it’s all too easy to get sloppy about the details. You may come around to the view that the theme is so powerful that you can safely disregard p/e ratios and other measures of value and risk. You may wind up basing investment decisions on offhand projections or self-serving advice from promoters.
Mind you, facts support many popular investment themes. Keeping those facts in mind can help you spot stocks with extra potential. But if you let the theme make the decisions for you, you are sure to overlook risk.
Why clean energy stocks only carry limited investment appeal
Successful renewable and clean energy stocks use steady research spending to come up with pioneering technological advances.
Successful investors now recognize that research and development spending is today’s best-hidden asset. That’s because companies have to treat this research spending as a day-to-day expense, much like maintenance or tax payments. So research spending comes right out of their current years’ earnings.
When they do it right, research and development spending is more like a long-term investment than an expense. When it pays off, it can yield dramatic long-term gains—but the risks are high with green energy stocks.
So, to cut your risk, we recommend that you focus on alternative energy stocks that already have a sound base of operations elsewhere. That helps offset the risks of expanding into renewable-power production.
Cut your clean energy stock risk by sticking with stocks that have a sound base of other operations
Those established businesses provide steady revenue streams, and that helps the company offset the risks of expanding into renewable-power production.
Risks, like subsidy cuts, are one of the main reasons why we continue to recommend that you focus on, for example, solar energy stocks that have a sound base of other operations, such as hydroelectric or wind power, to offset the added risks involved with investing in solar power. An energy company that is solely developing technology in solar power can be a very risky investment.
Keep in mind that at TSI we recommend that energy stocks as a group make up only a limited portion of your portfolio. They should be just a part of the total amount investors hold in resources stocks. That’s less than 20% for a conservative investor or as much as 30% for an aggressive investor.
How often do you make investment decisions based on an emotional appeal?
Clean energy stocks have both potential and risk. Too often, though, the idea of clean energy overrides our eye for details. Have you invested in clean energy without looking closely at financial indicators? How did it work out?
Comments
Peter
As generalizations, this is a helpful article for the enthusiastic but ill-informed. The points on water are especially well taken. It does not, however, cover the risks of traditional energy as well–beyond the obvious environmental ones. BP, for example, in the Gulf was an accident waiting to happen to a company that was not managing basic geotechnical risk in a responsible way. In varying degrees, the entire gas and petroleum industry have many of the characteristics of a sunset industry, like coal. How long the sun will take to go down on the industry is a complex and difficult question to answer, but in the long run, it will set. And all it will take is a few advances in electrical storage and efficiency to be developed to hasten that along, at great speed. A great deal of money flowing from private sources at the top of the technology world is betting that will happen, soon. That would be an interesting story to cover; I suggest boning up on that from sources at MIT, Cal Tech, Google, etc. So, good work on this one, but take on the wider problems in energy if you can manage it.
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As generalizations, this is a helpful article for the enthusiastic but ill-informed. The points on water are especially well taken. It does not, however, cover the risks of traditional energy as well–beyond the obvious environmental ones. BP, for example, in the Gulf was an accident waiting to happen to a company that was not managing basic geotechnical risk in a responsible way. In varying degrees, the entire gas and petroleum industry have many of the characteristics of a sunset industry, like coal. How long the sun will take to go down on the industry is a complex and difficult question to answer, but in the long run, it will set. And all it will take is a few advances in electrical storage and efficiency to be developed to hasten that along, at great speed. A great deal of money flowing from private sources at the top of the technology world is betting that will happen, soon. That would be an interesting story to cover; I suggest boning up on that from sources at MIT, Cal Tech, Google, etc. So, good work on this one, but take on the wider problems in energy if you can manage it.
Thanks for your feedback!
Unless specific companies names are mentioned as examples, the above advice is almost useless