Frank presented some great short-term and long-term stocks in Tuesday’s post. It’s important when investing to differentiate between short-term and long-term plays. You should always know why you are buying a stock, and knowing when you plan on selling the stock (in the short-term or long-term) is an important part of that equation.
But what do you do if a company looks good in the short-term AND the long-term? I’m going to address this topic using one of Frank’s picks as an example: SIRI (Sirius Satellite Radio Inc.)
Sirius has a great outlook, and I can definitely see why Frank (and most analysts) would recommend buying SIRI for a long-term play. Personally, there are two analogies which get me excited about SIRI long-term.
(1) Satellite Radio is the “cable TV” of the radio industry.
(2) In new cars, satellite radios are to traditional radios as CD players were to tape decks in the 90’s.
Satellite Radio is set up to replace a large portion of the traditional (so-called terrestrial) radio market share. The cable TV analogy is very potent. Just 12% of homes still watch TV using only an antenna. 
SIRI looks very good in the short term also. This week Jim Cramer of Mad Money fame recommended buying the stock (at ~6.60) to sell after Christmas. Why? He suggests Sirius CEO Mel Karmazin is a master of UPOD (Under Promise Over Deliver). Mel has kept expectations low; so when Q4 results come through SIRI is sure to outshine them. Here are some other short-term factors in SIRI’s favor:
- New Hardware – Ready for the holiday shopping season.
- NFL – It’s the middle of the season and SIRI has exclusive radio broadcast rights.
- Howard Stern – His show goes live on SIRI Jan 9th. Just listen to Stern’s morning show now (if it’s still on in your area) from 6:00-10:00AM for an advertisement of things to come.
Take a look at this graph:
Now just imagine that the section spanning Jan04-Oct04 shifted up 4 points and over 1 year. Line that up with the span from Jan05-Oct05. See the spike right around Christmas day 04? Now imagine that spike on top of the current price. We could see SIRI rally to $10 or higher.
Predicting a stock’s future just by looking at a graph is a great hobby of mine, but I wouldn’t suggest it for people spending real money. However, if you realize that the conditions surrounding SIRI in this winter are very similar to what they were last winter, you wouldn’t be crazy to expect a similar jump over the holidays.
So what can we do with a stock like SIRI that looks good short-term and long-term? To some of you, the answer is going to be obvious. The reality is that how you play this stock (and others that fall into this dilemma) depends more on your investment “personality” than any indicator in the stock.
The Trader: If the stock is going up, buy it. When it looks like it will go down, sell it.
The Investor: If I think the stock is going to be higher a year from now, I don’t care where it is 2 months from now.
If your leaning towards short-term with this one, you have to know your selling condition up front. Personally, I’m going to hold SIRI until the first sign of a drop after Christmas. This January, it will be tempting to “roll” this short-term trade into a long-term investment, but you (and by “you” I mean “I”) have to stick to your guns and sell that stock at the top.
I’m going into this trade hoping to make a 30-50% ROI. When that happens my goal will be reached, my life will be complete, the stars will be in alignment, and hopefully I’ll pull the trigger and make some money before SIRI slides into it’s typical roller-coaster pattern.
On the other side of the game, you could choose to go with SIRI as an investment. I think this is a strong and intelligent move. The upside to investing long-term (and part of the challenge) is that you have to buy the stock and then forget about it. SIRI is a very volatile stock, and it’s almost certain to drop a bit after the ramp up in December. The trader is trying to bail out at the top of the spike, but the investor can’t be concerned about short-term fluctuations.
Now, you don’t want to ignore the stock completely. If you see a drop in price or hear some news about the company, look into it. But you should keep your long-term goal in mind when doing your analysis. The question to ask is not “Will the price go down?” but “Is there anything here that affects the initial reasons I decided to invest in this stock?” If that answer is no, relax, have a drink, take a bath. Do whatever you need to settle down and think about how your retirement is going to be nicely padded with Sirius money.
Know why you are buying a stock. Know when you plan on selling it. Keep those goals and reasons in mind. If you are investing long-term, remember why you bought the stock when analyzing any new news. Is there anything there that affects the initial reasons you decided to invest in the stock.
If your investing long-term and you see some swings that you could have made money on (“I should have sold at $7.5. I could have bought it back up at $5.50.”), you might be a trader. But before you decide to trade a stock and devote your life to following it, make sure you’re ready. Do you have the time and patience to deal with the fluctuations of this stock? Are you personally knowledgeable enough about the company or industry to be able to tell when the short-term fluctuations will happen?