"Never ask a barber if you need a haircut." -- Warren Buffett
This has always been one of my favorite quotes from Mr. Buffett and speaks really to "common sense" - something that I have recently realized is not so common after all. The underlying principle in the quote above refers to "bias" - which is a preference or an inclination, especially one that inhibits impartial judgment. If you ask a barber if you need a haircut, the answer will always be yes. After all, that's how he keeps his shop open and thus what makes us human. "Bias" is what makes me cheer for any team that my son plays on and not his opponents. We demonstrate our biases in the voting booth as well as in our religious beliefs. Our biases often force us to conclusions absent real fundamental data - a psychological condition also known as "confirmation bias."
Blinded By Bias
I've been accused of "demonstrating bias" in my recent articles. Frankly, I wasn't sure of how to respond to that. After all, how does one respond to being called "human?" Thank you perhaps? Contrary to popular belief "bias" is not a bad word. But it seems that when discussing our investments, having a bias has become "inappropriate." But this really speaks to some of the irrationality that exist today on the stock market by thinking that we've won something when a stock such as Pandora (P) is down and not fully appreciating the opportunity it presents in terms of short term profits.
In a recent article by Rocco Pendola, he discussed such an opportunity as it appeared that Sirius XM (SIRI) had reached some resistance or a near term top, and presented the idea that it might be time to unload some shares and buy Pandora. But instead, the article was met with ridicule and not fully appreciated for the logic that it presented. Consider this, since trading at $15.25 on March 5 Pandora is now down 41% as of Thursday's close of $8.98 and down 10% on the year. Whereas Sirius has yielded gains as high as 32% on the year and as of Thursday's close it is still up 24%. In other words, we were ignoring the standard fundamental logic that the market always teaches - which is to "buy low and sell high."
Our bias caused us to cheer the struggles of Pandora and ignore our money - the very reason that we became investors in the first place. This is yet another example where investors were blinded by bias. I ruffled some feathers in an article on Thursday discussing the so called "smart money" and the fact that a few institutions recently unloaded some shares in Sirius XM (NASDAQ:SIRI). The implication was that the article was somewhat biased toward the sales and that the article didn't discuss positions that were added. Last October, Sirius XM sunk to an intraday low of $1.27 on over 180 million shares traded. Part of this is because 170 separate institutions decreased their positions during that span totaling over 300 million shares. So as I noted during the article on Thursday, the trend is what mattered, not how significant the positions might be perceived to be.
Speaking of "bias," earlier this week the Nasdaq released its bi-weekly short interest report on Sirius and as anticipated the number dropped this time by over 20 million or 6.5%. What this bearish bias tells us is that those holding short positions have been playing "the 15-cent pivot" that I have outlined in several articles recently and one that has become quite predictable. This only makes me wonder, why is this not being discussed and utilized more? The data in the table below is very telling. And one of the obvious signs is that the shorts have grown more confident in their positions over the past two months as the last column shows, they are holding their short position longer than a week.
This tells me that not only do they realize that the stock has a near term cap - which essentially eliminates some of the upward risk, but there is growing evidence that they are making a considerable amount of money from the $2.35 pivot point. Now turn your attention to the chart below and one can clearly see that only traders have been making money on this stock since it broke above the resistance point of $2.20. If you are one of the lucky ones to have realized this pattern and have used it to your advantage than you deserve some credit. It is remarkable how predictable this pattern has become.
Not only do the green lines in the chart above represent 10 cent swing average per day from the prior close, but the highs as well as the close of each day both average $2.33 - you have to remember this also includes lows of $2.19 and a couple of $2.23s. In other words, money is being made hand over fist on this stock and unfortunately it does not appear that retail investors were profitable.
As noted in the example of above with regards to Pandora and whatever missed trading opportunity that our biases caused, our bias has also caused investors to sometimes not see too clearly exactly what is in front of them. In the case of Sirius I continue to see evidence of investors waiting for pots of gold that may never come. But remarkably while waiting for the pot, we are ignoring the gold chips and stepping over the opportunities that are scattered all around us. In the stock market, opportunity costs have been replaced for "tunnel vision." Maybe next time I'll ask my barber if he knows the difference.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.