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Time to Turn Dial From Sirius to Pandora

NEW YORK ( TheStreet) -- After Sirius XM (SIRI - Get Report) reported earnings, reality became painfully clear, the share price was not moving higher. All the obvious numbers indicating a decidedly limited upside price potential were correct leaving Sirius nowhere to go but down. Sirius investors received everything they could possibly want from the last earnings report, and yet the stock price sold off. This is the classic buy the rumor sell the fact type of price action as Sirius moved higher into earnings as the "dumb money" rushed in while the smart money hit the exit.

I wrote about what happens to stocks that fall in price after reporting good news. It's a signal that everything favorable is fully priced in and no one is left who is willing to pay more for the shares.

If you were the "dumb money", and rushed in at the wrong time; don't feel inferior, we are ALL dumb money once in a while. 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 making 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 (800*1.20). You still have more to gain just to break even.

I know I am using a straightforward sample that many have already seen talking with financial planners, but Sirius is just as straightforward. The day of 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%.

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