I remember hearing all about how wonderful the Sirius/XM Satellite Radio merger was and how you should be buying stock and especially that you should buy because price was around $2.00 or $3.00 and if price moved just a little bit to $4.00 or $6.00 that you would double your money, not to mention if it got up to $10.00 or $20.00 over time.  However, that never happened – in fact, the opposite happened, which underscores a major point in trading.  DO NOT buy a stock only because it is cheap.  It might be ok to buy a cheap stock, but price should not be your #1 motivating (or heaven forbid ONLY) factor.

Let’s see this play out in SIRI.

The merger of Sirius Satellite and XM Satellite Radio took place on July 29, 2008… right where I have the arrow that points to the “Dang it!” area where I’m sure many investors figured this would be their last chance to buy because the stock was sure to skyrocket on the news of this merger and what it might mean.  I’m not here to discuss the news or fundamentals – many sites do that far better than I can – but I’m here to analyze the effect on price after that event.

I remember being tempted myself in 2006 and 2007 to buy Sirius for the long-haul because the stock traded around $4.00… then $3.00 and I figured just like everyone else that Sirius was bound to be a long-lasting company and that the share price at that level was an immense bargain.  Millions of other people thought the exact same thing, as evidenced by the daily volume of that time, which averaged near 200 million shares per week.

I remember also the hype around the XM Satellite Radio merger and how that was discussed so frequently at the time.  Notice that on the week of the merger, almost 800 million shares traded hands that week – a phenomenal, staggering amount.  However, the best play at the time was the one that was far from obvious – you should have shorted aggressively at that point rather than bought aggressively.

Technically, price had broken a long-standing down-sloping trendline which arguably formed a descending triangle (notice the resistance line from the falling 20 week EMA).  After the breakdown in June 2008, price formed a bear flag retracement (or ‘throwback rally’) to test the confluence resistance of the trendline and falling 20 week EMA as overhead resistance which held, forming a type of shooting star and then collapsing into new price lows few if any thought possible.

It’s tempting to say “If I buy thousands of shares at $2.00 per share and price goes to $4.00 per share, then I’ve doubled my investment.”  Moreover, it’s tempting to fall into the trap of “When a stock is cheaper, I can buy more shares.”   Which sounds ’sexier’ for a $100,000 investment:

200 shares of a Google-type stock at $500  or
50,000 shares of a SIRI-type stock at $2.00 ?

I’ll let you be the judge but I implore you to think beyond your greed and trade with your senses, not your emotions.  Stick to middle-of-the-road companies that trade between $20 and $80 per share for investments, give up the possibility of doubling your money in a month, and work to manage your risk.

I had a conversation with a broker last night who says he has more than a few clients who want to buy  thousands of shares of companies – particularly financial companies now – trading less than $3.00 per share.  His response to them?

“Fly out to Vegas, pick a color on the roulette wheel, bet it all, then watch them spin the wheel.  Hey, at least you’ll have more fun that way and you’ll actually have better odds – 47.5% – of literally doubling your money overnight than if you bought a penny-stock!”

My thoughts exactly.

Corey Rosenbloom
Afraid to Trade.com

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