Well I learned my job I learned it well
Fit myself with religion and a story to tell
First they made me the king then they made me pope
Then they brought the rope
-Bruce Springsteen, Local Hero
Among the most ardent Sirius XM (NASDAQ:SIRI) longs, I get the sense that a competition exists for head cheerleader. If you read the comment threads on Seeking Alpha articles and look to other places where SIRI longs congregate, it's quite scary to read the rationalizations and calls to buy more.
When I owned SIRI Sept $2.50 calls, there was a time when it looked as if the pre-earnings run many had anticipated was about to materialize. A stock's put/call ratio can provide a sound gauge of investor sentiment. Back on July 5th, I noted that SIRI's put/call ratio stood at a bullish 0.11. Shortly thereafter, things began to fall apart chart-wise, the pre-earnings run was not going to happen and I closed my position.
Fast forward about six weeks and you have a broken stock. What many longs fail to realize is that the chart died before things got really crazy at the macro level. When SIRI failed to hold and then break $2.35 in mid-July, the party was officially over. In hindsight, my biggest mistake was not selling my calls prior to July 26th. Looking at the chart, the market officially pronounced SIRI dead on July 18th. The put/call ratio stands at 0.98, as of late Monday.
Click to enlarge
(Chart courtesy of FreeStockCharts.com)
And now, with the stock breaching key technical levels on an up day for the market, it's clear that the flood gates have opened.
Sirius XM longs should close their positions and live to fight another day, assuming that day comes. Don't mistake credible warnings about the stock, its chart and the company for some concerted effort to bring the share price down. That's patently absurd. Not opening your mind to different perspectives - ones that are not emotionally attached to the company and the stock - is little more than investment suicide.
The writing has been on the wall for weeks. Cut your losses and move on. "Hope" is certainly not a core component of an investment philosophy. Neither is constantly encouraging fellow shareholders to not only ignore, but marginalize the negative, while blindly accentuating the positive.
As fellow Seeking Alpha contributor Efficient Alpha pointed out in an article this morning:
Confirmation bias is blocking information contrary to a belief or only seeking that information that supports the investor’s previous opinion. This is an easy one for investors because there is enough analysis and opinion on the Internet alone to support any view. There’s no better example of confirmation bias than with Sirius XM ... Fortunately, this is also one of the easier behaviors to confront. By actively seeking a contrarian view to the current opinion, the investor can better understand the risks to their investments.
Loss aversion is holding a losing investment longer than appropriate or increasing the level of risk in the portfolio due to a loss. The behavior is most easily seen in gamblers. Given $100 of winnings, a player may walk away from the table hoping to take the money and run. Given losses, however, the roulette player will put more money on the table in the hopes of breaking even. Even as an investment’s fundamentals change for the worse, many investors will deposit more money, hoping to win big on the rebound. In a rising or break-even market, the investor would not take on the added risk but losses can cloud the judgment.
For investors, there is a time when doubling-down or dollar-cost averaging may be appropriate, but do not add to a position simply because it will bring your average cost down and you will have lost less on a per share basis. The best way to decide whether you should put more money toward an investment after it has suffered losses or should cash out of a bad investment is to diligently watch for the other behaviors listed in the article, especially anchoring and confirmation bias. If, after a careful analysis, the asset still looks like a good investment then dollar-cost averaging may be appropriate.
Or, put another way, learn the craft and do your best to become a master at it, independent of the inane noise. Just don't let anybody, no matter how many times they scream "manipulation" or "buy" or "the competition sucks," bring you the rope.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.