Emotional Investing: The Case of Sirius XM

| About: Sirius XM (SIRI)
This article is now exclusive for PRO subscribers.

When I wrote an article with a less than glowing review of Sirius/XM's (NASDAQ:SIRI) prospects, I did not expect to generate such an enormous response. While common on this anonymous free-for-all we call the Internet, the display of incivility and just a flat out meanness in this world saddens me. My friend, Gordon Keith, summed my thoughts up nicely here. Inherent in many of the comments I received, however, is a reminder of the biggest lesson we learn, right after buy low, sell high, as investors. Don't get emotionally attached to your holdings.

The merits of my argument vis-a-vis SIRI and Clear Channel (CCMO.PK) notwithstanding, it's dangerous to let your emotions get in the way of how you handle a position in a stock. More than most securities, SIRI allows for a clear look into several facets of investor psychology. And before detailing them, I fully recognize that many people have done very well taking a chance on SIRI when it was worth pennies. I applaud the call.

If you hit it big in this fashion, I hope you have taken your hefty profits and moved on to bigger and better things. If you got into SIRI post-$1.00, banking on a meteoric rise past $5.00, don't hold your breath. The odds are stacked against it. I would be beyond thrilled with a double or triple on my money over the next year or two. I flipped SIRI stock on the obvious Howard Stern rant in December and will get out of 2013 LEAP options once emotion and lofty expectations take the stock past $2.00 for a while.

The Peter Lynch Philosophy

Some investors subscribe to the legendary money manager's contention that you should invest in the companies you know and love. Aside from America's company (NASDAQ:AAPL), I don't. Lots of people love Sirius/XM as consumers. I subscribe. I cannot get enough of the Springsteen bootlegs on E Street Radio, the live streams of CNBC and Bloomberg, and frequent doses of Howard Stern. Sirius fits well with my work and lifestyle. Just because I enjoy being a subscriber does not mean I become a cheerleader for the company. Worse yet, I am not going to put my money on the line in the face of real challenges to the business, particularly increasing and fierce competition and the likelihood that new subscriber growth will slow or hit a wall right around the same time SIRI ends up raising its rates.

Certainly, you could score a double or triple on SIRI in the next several years, but there's a good chance you won't. For some people, that risk makes sense. They don't have time to take profits and search for other investment opportunities. They'll choose to tie up capital waiting for SIRI to live out their storybook story. I prefer to put that money to work elsewhere. Buy-and-hold as an investment philosophy is dead, except in a few standout cases.

This Stock Will Make Me a Millionaire

We all do it. "If I own 800,000 shares of a .01 stock, how much will it be worth if it hits a dollar. Wow, I'll be rich. I'm in!" A similar psychological misstep occurs with SIRI. Just because people bought and successfully ran with this stock from a nickel, doesn't mean you will. But the math, as of midday Thursday, proves enticing.

$1.82 X 1,000 shares = $1,820
$2.00 X 1,000 shares = $2,000
$3.00 X 1,000 shares = $3,000
$5.00 X 1,000 shares = $5,000
$50.00 X 1,000 shares = $50,000

When you start running these numbers, it's almost like you're involved in a scam that spins out of control. The problem, however, is that in most cases, you're only scamming yourself. It's so easy to simplify that math and overstate, in your heart and then your mind, the odds of your stock hitting your baseless targets. You crunch the numbers, like a professor designing research with the express intent of doing nothing other than proving his hypothesis. The mind plays amazing tricks on investors who allow themselves to get into these situations. You go against your better judgment. In fact, you forget that sensible side of you even exists. Cognitive dissonance ensues. And before you know it, you're trolling message boards defending your stock to the death, posting rants that resemble a Moammar Gadhafi speech.


And you can replace SIRI with many other ticker symbols, of course. In another article, I suggested if you had just $352.12 $360 to invest, you should buy one share of AAPL. I am dead serious about that. I would even advocate dollar-cost-averaging into a stock like AAPL for the rest of your life. You might not get rich, but your money should grow.

Let's call SIRI a $1.80 stock, as of midday Thursday. With $360 you could buy 200 shares of SIRI versus just one measly AAPL certificate. I am willing to bet you'll have more to show for your AAPL investment in one year than you will your investment in SIRI or a vast majority of stocks trading under $2.00, as of March 2011. It's certainly not as sexy to buy just one share of a stock, but when you have the choice to invest in a powerhouse like America's company or a company with more question marks than a bar exam, it might just be the best route.

Disclosure: I am long SIRI, AAPL.