If you were the "dumb money," and rushed in at the wrong time, don't feel inferior; we are all dumb money once in awhile. What's crucial is to understand when we have outsmarted the person on the other side of our trade and when they have outsmarted us.
Unless you believe you don't make mistakes, you will want to embrace your investments that don't make money just as you do with the ones that make money. In the end, they are the same and what we get paid to do as money managers (our own money or for others) is make the correct decision as often as possible. Our investing results are not our losing trades or our profitable trades, but a combination of both.
If you allow your portfolio to lose 20% on one investment like Sirius, your portfolio must make more than 20% just to break even. For example, let's say you start out with $1,000 in your portfolio and lose 20%. You now have $800 in your portfolio. If you have a gain of 20% on your remaining $800, you will have a portfolio valued at $960. You still have more to gain just to break even.
I know I am using a straightforward sample that many have already seen while talking with financial planners, but Sirius is just as straightforward. The day of their earnings, the company reported about as good as can be expected and the stock still sold off. Now again today there is a buyer stepping up: Liberty Media (LMCA) who already is the largest owner, is buying an additional 300 million shares (from a float of ~6.5 billion shares). How does the market react to the largest shareholding increasing their holdings? The stock price gaps higher, only to move lower and fall continuously for much of the day before finally gaining support to close down another 2%.
After trending down for the past week, Sirius is due for a bounce, but the fact remains that "normal stocks" shoot up quickly on news of a possible takeover. Sirius wasn't able to move up 15% and it's almost a penny stock. I see more life out of worthless pump and dump stocks after a decent email blast than Sirius demonstrates with a valid buyer.
How can this be? Simple -- you're not looking at a buyout; you're looking at a buy under. It doesn't happen a lot, but I have traded them profitably before. Liberty Media didn't get to where they are by overpaying for assets. If Liberty Media is paying $2.15 per share for $650 million worth of Sirius and there is another party who agrees this is a reasonable price, don't you think perhaps $2.15 may be what Sirius is worth?
The market overall tends to agree that Sirius is valued near $2.15 based on the final closing price. To argue otherwise is the same as stating that both parties to the transaction are wrong and you are right.
Perhaps most ironic to the whole valuation process is the value the
Sirius as a tax-advantaged investment makes a lot of sense when one considers the sky high price-to-earnings ratio given to Sirius. Sirius has finally broken down to "only" the mid-20s, a price multiple typically suggesting strong growth. However, in the face of increasing lower cost providers such as Pandora
Sirius wasn't alone today in releasing fantastic news. Pandora announced April's listener hours surpassed 1 billion hours and climbed up 87% from April of last year. For the total US radio listening, Pandora's April market share was just short of 6%, up from 3.1% in April 2011.
Unlike Sirius's reaction to a potential buyout, which amounted to a loud thud, similar to a heavy book hitting the floor, Pandora moved up over 8%, closing over $9 per share for the first time in May.
Lesson to be learned? When the market provides clear direction, it is best to pay attention. Sirius doesn't appear to move higher even with substantial news. On the other hand, Pandora responds robustly, and with conviction. If Pandora is able to maintain a price over $9 per share, I will likely once again consider it a stock to accumulate.
Daily Recap Newsletter