I own shares of Sirius XM Radio (NASDAQ:SIRI). Please stop laughing. I blame love.
I’m a huge audiophile and love my satellite radio. Unfortunately, I didn’t stop the love with my monthly subscription. I bought shares of both Sirius and XM years before their merger -- back when Howard Stern was still a terrestrial-radio thorn in the FCC’s side.
I ignored their huge debt loads and massive losses, choosing instead to focus on the upside of a scalable business once everyone tried the service in their new cars.
Oops
I greatly overestimated the scalability of the business because I overestimated the demand for a great music service.
And it gets worse. At one point, I was sitting on a four-bagger with my pre-merger Sirius shares. Instead of cashing out on the irrational exuberance of the Howard Stern mania, I held on until now, years later, I hold something closer to a fourth-bagger (if such a term exists).
Basically, I let my love of satellite radio override the fundamentals of the company’s stock.
But I’m not alone
I believe every investor has a love stock. We all have that one stock that makes us irrationally exuberant. But knowing we have that bias helps us fight against it. Here are a few reasons you may be in love:
- You’re a huge fan of the company’s products.
- You work at the company.
- You want to be correct on a contrarian call.
- You’ve had hot returns from the stock in the past.
- You’re suffering from Stockholm syndrome due to all your research on the company.
It’s much easier to see the love in other investors’ eyes than it is to self-diagnose, though. I see cases of love-crazed investors every day in the comments sections of our articles and in my e-mail inbox, so let me share some secrets. With apologies to Jeff Foxworthy, you might be in love with a stock if your rebuttals to naysayers include:
- Profanity
- Logic that is grounds for a diagnosis of schizophrenia
- Personal insults
- A 50-word run-on sentence
- The belief that dissenters are idiots per se
- Basic grammatical and spelling errors
The worst offenders
We’ve covered why you may be in love with a stock and some telltale signs for diagnostic purposes. Without further ado, here are some companies (besides Sirius XM) that tend to get more than their share of Valentines on February 14:
- Bulk shippers like Dryships (NASDAQ:DRYS)
- Apple (NASDAQ:AAPL)
- Berkshire Hathaway (NYSE:BRK-A)
- Any solar stock (e.g., First Solar (NASDAQ:FSLR))
- Crocs (not so much anymore, but during its heyday …)
- Starbucks (NASDAQ:SBUX)
- Google (NASDAQ:GOOG)
- Any gold-related stock (or gold itself)
Now, some of these are excellent companies, and many could be excellent investments. Heck, I own shares in two of the above companies (and unlike with Sirius XM, I don’t believe love has blinded me). They’re merely stocks people tend to be passionate about, sometimes beyond the investing fundamentals. If you own one of these stocks -- or any stock, for that matter -- ask yourself if you own it because of the fundamentals or the hype. Make sure that you own it for the right reasons.
At an exclusive dinner party, a woman once asked Warren Buffett’s business partner Charlie Munger, "Mr. Munger, you know you are a great investor. You have become a billionaire with your investment ideas. What is your secret?" His response: “I am rational.”
So if you take away one lesson from my Sirius XM experience, let it be cold rationality. Emotions have their place in the real world, but not in the stock market. As Charlie would suggest, making money in stocks involves examining a company’s financials to make sure it’s on solid footing and is trading at a discount to its fair value.
If the analysts at our Inside Value newsletter have a love stock, it’s Berkshire Hathaway. But they’re pretty cold and calculating about the rest of their portfolio. They rigorously calculate an intrinsic value and margin of safety for every one of their recommendations. You can pick their brains for free with a 30-day trial. Click here to get started -- there’s no obligation to subscribe.
Anand Chokkavelu’s love for Sirius XM faded a little when it replaced his favorite channel (UPop, channel 29 on XM) with the far inferior BBC Radio 1. He owns shares of Sirius XM, Berkshire Hathaway, and Apple. Berkshire Hathaway and Starbucks are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers recommendation. Apple, Berkshire Hathaway, and Starbucks are Motley Fool Stock Advisor recommendations. The Fool owns shares of Berkshire Hathaway and Starbucks. The Fool has a disclosure policy.
