3 Trades for ‘Crazy’ Investors

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crazy investorI always knew stock traders had a screw loose. How else do you explain participating in a market as crazy as today’s? Anyone attempting to make money in this environment ought to have their head examined. And a new study backs up that sentiment.

According to a German study, first reported by German weekly Der Spiegel, traders are more ruthless than psychopaths. While traders might not be violent, the massive egos required to play the stock market game are indeed greater than those of criminally violent crazies. Anyone who knows a trader probably isn’t surprised by this revelation.

Michael Lewis’ book about Wall Street, Liar’s Poker, portrayed traders as a bunch of self-interested maniacs. Sit on the desk of any Wall Street firm, and you will find traders willing to win at any cost. Some will cross the line and break laws. They crave risk like children love candy. The psychological profile of traders is not pretty.

But that’s the nature of the beast. Traders walk a fine line between healthy and destructive behavior. And the article discussing the study says some traders manage this line better than others. Winning traders know when to walk away. The excerpt from The Rise and Fall of Bear Stearns about Ace Greenberg and his mandate that traders at his firm jettison losing positions on Fridays is insightful.

When traders get involved in a position, they have to love the story, but not too much. They expect to win every trade, but those that do best understand that some trades will not work out. With that in mind, here are three crazy trades you can fall in love with, but must know how to walk away from if things go south:

Sirius XM Radio

Those committing capital to Sirius XM Radio (NASDAQ:SIRI) do so from a very innate belief that Sirius’ business model will explode in a wave of massive profits and stock gains. Bulls buy the story hook, line and sinker. They will blindly buy the stock despite a valuation of more than $5 billion and a business that is barely generating profits.

A crazy trader might look at this story and ignore the major issues. Sirius certainly has the potential to clean up — it’s currently a monopoly and recently announced that it would be increasing prices.

A market correction during the past few months has crushed the bulls in Sirius. For now, the shorts are winning this battle, but don’t get too excited if you hold this position. The company could be a big moneymaker — if it can show increases in its subscriber base and growing revenues. It’s just hard to tell. Being on either side of Sirius is nuts for sure. This stock is not for average investors.

Research In Motion

Research In Motion (NASDAQ:RIMM) is an easy crazy short trade. The maker of BlackBerry devices has been handed its lunch. The only thing left of this dying company is the obituary. Will the company fail, or will it be sold (as was the case with another dead device, Palm)?

If you are a trader that believes in cutthroat competition, you understand the endgame for RIM. In fact, I suspect you are so convinced of its demise that you will sell this stock short until a final resolution is had.

If you do want to pursue the short side of this story, keep a level head. A buyout of the stock could result a higher price than you might think. Even worse would be for this company to figure out how to impress its fairly lower customer base with a winning product. Personally, I don’t see that happening, but just be aware of the risk before you pursue an all-out short sale of this loser.

Netflix

It would be interesting to study the most emotional of traders to see the characteristics of the stocks they trade. I suspect fundamental valuation is far down the list of things this group of traders looks at. Instead, they follow technical or momentum indicators that confirm a pre-existing lust for a particular company. Netflix (NASDAQ:NFLX) comes to mind.

Up until recent stumbles, long traders in Netflix couldn’t lose. Now it is the shorts that are having their way with the story. Making money trading Netflix has nothing to do with fundamentals. Instead, it is all about game theory. And the batty Netflix trader wants to pummel the opponent.

If an investor is long NFLX, he will pound the table of a business model that cannot lose. He will instill fear in the shorts by propagating a story of huge riches to be found streaming home movies. He wants to paint a picture of Netflix cornering then dominating the market.

The short seller wants to do the opposite. She too wishes to instill fear but does so by betting that Netflix will go the way of the video store. She wants longs to worry about the competition, especially with respect to personal computing devices that can do more and more with less. She wants the longs to fear Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).

The Netflix investment story is dead. All that remains are two armies of frenzied traders battling it out in the market on a daily — or even hourly — basis. Jump in at your own risk.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/crazy-investors-sirius-xm-rim-netflix/.

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