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How to Not Get Burned by Low-Priced Stocks

While it might seem like I am merely poking fun, you really do need to pay attention to the phenomenon of at least some segment of a shareholder base resembling maniacal sports fans.

Would you take a stock tip from a drunk and shirtless fat dude, face painted, sitting in the bleachers at Cleveland Stadium with a rawhide bone hanging from his mouth in below-zero weather on the shores of Lake Erie? Of course not. It only follows, then, that you would not take Sirius Love's advice to "buy on the dips" in a comment populated by the signature line: "Long live SIRI."

All too often, low-priced stocks have a hope and a prayer attached to them. That's clearly the case with SIRI, a stock that ran from pennies to the $2-plus level. Just as we like the looks of owning 5,000 shares of a $2 stock over 100 shares of a $100 stock, we get taken by the math. If the $2 stock gets to $3, I am sitting on a cool $5,000 profit. If it gets to $20 or $50 or $100, I'm rich. We've all run those numbers in our heads.

Because this type of lotto ticket dream holds such allure, we seek out information that validates it as a real-life possibility. That's just basic psychology. We filter out "noise" that attempts to take the dream away.

We allow our investment to turn into a passionate battle of us against them. It happens more frequently with low-priced stocks because investors often associate the low price with the notion that the true value of the security has yet to be realized.

More often than not, the most vocal longs label market makers, hedge funds, bloggers, financial writers and others as "manipulators" colluding to "keep SIRI down." Passion breeds more passion. Emotionally charged attempts at logic beget a series of bad decisions. And before you know it, the dream dies.

Along similar lines, take great care when investing along the lines of taste, preference or sociopolitical leaning.

Just as most Sirius XM longs stand by satellite radio, plenty of folks believe electric vehicles are the logical and politically righteous future. They may or may not be. The answer to that question, even if it's "yes they are," does not necessarily mean every EV-related stock is a sound investment.

Consider Ecotality (ECTY).

The company's CEO, Jonathan Read, is not quite on par with a Sirius XM bull, but you still must beware. While I appreciate his pluck -- and he clearly knows his stuff -- he sent me a red flag in January.
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