LESSON NUMBER THREE

In the past few day Sirius Satellite Radio (SIRI) fell below its 52-week low of 2.51 - and I recommended that it be SOLD if this happened. (I exited my entire position at just below 2.50 for a loss of about 5%.)

This is in keeping with the investing strategy that I teach in my stock market course -- avoid big losses on any single transaction.

One way of looking at this is think of it as buying insurance. When you sell, you are buying insurance against any further decline in the stock. In the worst case scenario, should your house burn down (or your stock go into a tainspin) - the most you can lose is the expense of your insurance premium (or, in the case of a stock, a 5% loss.)

NOTE: In class, and in my personal investing, I use the 5% loss limit. I arrived at this figure by experimenting over time and it is easy to compute. However, I would not argue with an investor who selected another level - as long as it was under 10%.

Now for today's lesson: One of the most frustrating things that happens to investors is to sell a stock and then be sitting on the sidelines when the stock takes off. (Not long ago I sold Apple at 72 and then watched it go to over 200.) When most people take a loss (hopefully a small loss), it is human nature to be reluctant to get back in. "It's unlucky." "I don't understand the stock." "It's not behaving right."

WRONG!

To win at anything, you have to be willing to do what the herd doesn't do and to fight your natural instincts. When one takes a small loss, it often means nothing more than your timing wasn't perfect.

My experience and study shows that after a small loss, the best thing you can do is put the stock symbol up on your bulletin board/white board with a "buy-in" price. Your insurance policy (selling with a small loss) protected you from a major disaster, now it's time to get back in. For me, the buy-in price is 5% above the most recent low.

In the case of SIRI, the closing low was 2.41 - so my buy point becomes 2.53, a 5% advance over the low. For my personal account, I bought SIRI on April 23 at 2.57 and the stock is now at 2.62.

The other stock of the satellite radio twosome -XM Satellite Radio (XMSR)- was suggested to readers
of this blog as a possible buy should it close under 10.60. It did, in fact, close below that figure (10.49) a few days ago. If it had been bought, you would now be holding XMSR at 11.56 for a 9.1% gain in three
trading days.

To repeat and expand on some important caveats from the prior blog:

A) These are speculative and volatile stocks. These are for agile investors who follow the market on a daily basis.

B) These stocks are involved in merger that is pending before the regulators. Should the merger blow up, the affect on the stocks could be significant. For this reason I would be reluctant to put more than
a small percentage of my investable funds in these stocks.

C) But from these levels, both stocks have enough upside potential (25 to 50%) to make them very interesting trades.

(Blog written after the market close on April 23.)