Tom Konrad CFA
I like to think that one of the things that distinguishes me from the mass of investment bloggers and newsletter writers is that I write about my mistakes, as well as my great calls. This is not just a service to readers, but a service to myself.
Overconfidence and why I write about my mistakes
One of the most pernicious cognitive errors common among stock market investors arises from our wish to see ourselves as great investors. One of the ways we accomplish that goal is to selectively and unconsciously self-edit our memories so that we can tell ourselves (and others) that we were correctly able to predict what was likely to happen. While this may make us feel good, it has the pernicious effect of persuading ourselves and others that we’re a lot better at investing than we really are. Such overconfidence is particularly dangerous for an investor, because it leads us to put too much faith in our predictive abilities, and leads us to mistake our guesses for insights.
Investors who mistake their guesses for insights often put too much money on them. Betting too much is dangerous in two ways. Most obviously, we lose money when those guesses are wrong. When those guesses are right, we make money but end up even more overconfident than before. That leads us to put even more money on the next guess. If we keep on guessing right, our belief in our infallibility grows along with our fortune, until the odds catch up with us, and we go broke making one enormous bet a on guess we mistook for an infallible prediction.
At this point, most of my readers are probably patting themselves on the back for having avoided such dangerous overconfidence. I’m a very lucky writer to have readers who are the product of millions of years of evolution favoring overconfidence, but who have mostly managed in various clever ways not to fall under the influence of that overconfidence when it comes to investing in the stock market.
Unfortunately, I am not made of such stern stuff, and I must resort to all sorts of ruses in order to remind myself that I’m far from infallible. One such ruse is my discipline of writing every quarter about how my annual ten renewable energy and energy efficiency stock picks have been faring throughout the year.
This quarter, I’m getting in touch with my humility.
In the three months since I last wrote about my Ten Clean Energy Stocks for 2010, the overall market has risen strongly. My broad market benchmark, the Russell 3000 index has risen 5.9%, while my industry benchmark, the Powershares Wilderhill Clean Energy Index (PBW) has risen 9.3%. In contrast, my ten stock picks have gained only 1.1% on average, while the alternative portfolio that substituted two ETFs, the Powershares Global Progressive Transport Portfolio (PTRP) and the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID), for six of the stocks did slightly better, gaining 5.2%.
In large part, my poor performance this quarter is explained by one stock on which I was quite decidedly wrong: C&D Technologies (CHP).
C&D’s financing was tight at the end of last year when I recommended it, but I expected that they would have enough liquidity to meet their obligations without much improvement. To make a long story short, quarterly results were not quite as good as I had hoped, and the declining stock price became a self-fulfilling prophecy, cumulating in a massively dilutive debt-for-equity swap that left stockholders owning only about 5% of the company. The restructuring will greatly increase C&D’s liquidity by removing $127 million of debt and the associated interest obligations. This should leave the company in a much better position going forward. But, since the debt swap valued CHP at about $0.25 per share according to my calculations, investors who bought it at the $1.40 stock price at which it was included in this list are unlikely to recoup their losses for quite a while. On the other hand, investors who saw my September 15th comment that $0.21 seemed like a good price, as well as ones who bought with me at $0.30 the day before could see decent appreciation before the end of the year.
Portec Rail Products
As I mentioned in my recent article on Mass Transit supplier stocks (where I also discussed New Flyer Industries (NFI-UN.TO/NFYIF.PK)), L. B. Foster’s (FSTR) friendly attempt to take over Portec Rail Products (PRPX) was extended to August 30 when FSTR increased the offer price to $11.80 per Portec share and agreed to pay $2 million to Portec if the deal does not go through. Shareholders have tendered sufficient shares, but the deal is awaiting Department of Justice approval. Foster management seems confident that they will get this approval before year-end.
First Group PLC
In a recent article on Rail and Mass Transit Operator companies, I concluded that I preferred Stagecoach Group, PLC (SGC.L) to FirstGroup PLC (FGP.L) because of their relatively low debt and strong liquidity. I will continue to track FirstGroup in my year-end performance update, but if you’re considering purchasing one of these now, my preference is Stagecoach.
As you can see from the chart above, my picks are down 8.0% for the stock portfolio and down 0.4% for the stock/ETF portfolio for the year. These results fall between the mediocre +2% performance of the broad market and the dismal -14.4% performance of Clean energy sector benchmar
k, PBW. In other words, nothing to brag about.
I’ll continue my humility building exercises in a couple of weeks with my quarterly review of my ten gambles for 2010.
DISCLOSURE: Long CHP, NFI-UN.TO/NFYIF.PK, PRPX
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.