August 17, 2006
We discussed last week about general ideas in value investing, Ben Graham, Warren Buffett, and the psychology of investing. This week we are going to discuss an example of personal experience regarding speculating and the downfalls of doing so.
My personal experience included a wonderful, well-known stock named Sirius Satellite Radio (SIRI). Allow me to explain how I became involved in this security and the reasons for doing so. In the winter of 2004, I began trading SIRI on a “tip” from a relative, and throughout the course of a few months, I netted a healthy return on purely trading on volume. I felt that it was easy enough to buy the stock in the morning watch it throughout the day, and maybe hold it overnight before getting out for a profit. I became confident of this strategy and before I had ever taken a course was convinced of technical analysis.
Following the signing of big profile broadcasters, most notably Howard Stern, I felt that Sirius was ripe to explode purely because of Stern’s listening base and the potential increase of subscribers. Further, I thought of satellite radio as this generation’s cable television. I personally subscribe to Sirius, and actually really enjoy the programming. I purchased shares in the fall of 2005 before Stern’s debut in January on Sirius. Instead of following my previous strategy, I decided to go long on Sirius because of my interpretation of expected growth. Grant you at the time, and currently, Sirius was loosing millions of dollars each quarter in trying to acquire subscribers and spur growth of the company. They hired a top notch CEO from Viacom, Mel Karmazin, who had a proven record of accomplishment in terrestrial radio over the years. Everything in my eyes looked great and I was merely waiting for the profits to come rolling in.
Well they did not; I purchased Sirius for a price of $7.12/share, with the closing price of Wednesday (8-16-06) at $3.65/share. I have incurred a net loss of 48.95% over the course of roughly a year and a half. So the questions are “Jon why did you ever buy this stock in the first place, you should have just looked at the financial statements and seen what was going on?”, and “Why did you stay in the position for so long?”
To answer the first question, I fell under the spell of what I call the “speculation potion” by that I mean you place rose colored glasses on and view the potential of a company not seeing the disaster in the waiting. I was convinced that if I didn’t get in on this stock, I would regret it just as I did Chicago Mercantile Exchange (CME), Google (GOOG), and countless others. What I realize now that I didn’t then is that in investing you must develop a strategy and stay the course. Further, as we spoke in last week’s issue, you become an owner of the company, not an owner of the stock. In my mind at the time ownership ended on the screen of my Ameritrade account.
The second question regarded why I didn’t and still haven’t exited my position. This issue is purely psychological as I was adamantly against having a loss and decided to hold the stock until it recovered the losses. I am coming to terms with my poor investment decision and am ready to exit my position. It is similar to Alcoholic’s Anonymous where everyone stands and states “Hi I am_____ and I’m an alcoholic”, well I am standing up and stating that I am a former speculator and am seeking treatment. Just for the record, I by no means am comparing the two; I am merely using this example for comic relief.
Where Sirius will go in the future is beyond me or anyone else, currently their financial position is worse then ever. The ROE for fiscal year 2005 was (265)mil, and its Q2Y2006 EPS where (.87) down from (.83) the quarter prior. Every aspect of Graham’s investing strategies screams to stay away from this stock. Although sales are increasing extraordinary, because of subscriber growth (see article below), expenses rise linearly as well.
Ending, I hope that you all learn something from my painful lesson, do research, think logically, don’t expect to become rich overnight, and never trust other’s judgment and research.
WSJ article on Sirius
Reuters article on Sirius
Discuss this article in our forums.