Sunday, July 9, 2017

Investing Lesson: Why Buying Netflix In 2012 Made Me Foolish

By Stockles

It's hard to imagine that it has been five years since I bought my first stock, Netflix (NFLX). When I look back and think about the mistakes, lessons, and experiences over these years, I am quite humbled.

Investing is something special and, somehow, it makes life a bit more profound and enjoyable.

However, there are things I wish I would have learned earlier. Back in 2012, NFLX was a growing company and I quickly realized a gain of about 70%. I thought I was the king and that making money in the stock market was so easy!

Because of my success with NFLX, I wanted to find other stocks to earn money with.

Before buying another stock, though, I decided to learn more about investing so that I could become even better. I googled around and everyone seemed to recommend The Intelligent Investor by Benjamin Graham.

So, I picked up the book at the library and started reading. I suppose I read about 20-50 pages before returning the book to the library. If you asked me at the time for a three-word review of the book, I probably would have said something like: Alienated! Utterly Boring.

One would think that reading such a highly recommended book would have a positive impact on a 19-year-old. Instead, I spend several years speculating on the stock market, foolishly chasing binary bets with little or no margin of safety.

The problem was that I started with a book that was too advanced for me at the time. It made me dislike fundamental analysis for about 3 years and I went straight into the world of technical analysis and doing speculative bets.

I think most beginners start like this, as the following quote so aptly suggests:
"The value of hindsight lies in the fact that lessons learned in the past by others can enable subsequent generations to avoid having to learn them anew. And yet, it seems investors must learn those lessons over and over – and often the hard way."
Thinking about this, it makes sense. If you don't have any experience and little understanding of a company's earnings, how on earth could you comprehend something as profound as fundamental analysis? No, it's much easier to speculate and look for something that seems to be close to the bottom or almost touching the ceiling.

Can I blame my NFLX trade for influencing my earlier approach to the stock market? And did I have bad judgment when I sold this stock for a 70% gain, while I could have had a 650% gain?

The answer is no! The fact is that I had no clue what NFLX was worth, both when I bought the stock and when I sold it!

This leads me to two different investment strategies that I think everyone should know about:

  1. Value Investing: With value investing, an investor considers the long-term fundamentals of a company, including its financial performance, current cash flows, and projections, to determine an intrinsic value of the stock. If the stock trades for less than intrinsic value, it is considered a good investment opportunity.
  2. Growth Investing: With growth investing, the focus is on the potential of a company to deliver above-average earnings growth. So even if the stock price seems expensive based on metrics such as price-to-book or price-to-earnings ratios, a stock with great growth prospects is considered a good investment opportunity.
The problem with my NFLX trade was that I failed to recognize that NFLX was a growth stock. When I saw the stock price go higher and higher, setting one record after another, I got scared. I thought that selling for a 70% gain would be considered good timing and that taking the profit before the stock price fell would be a wise move.

Unfortunately, the stock price did not fall but just continued to go higher and higher, and I “missed” out on making a fortune.

How could I have done this differently?

If I knew then what I know now, I would have labeled NFLX as a growth stock. I would have held on to my shares until the company's growth prospects deteriorated. That's what you do with growth stocks – you keep them so that they can grow!

Here's the takeaway message: figure out if you're a value investor or growth investor. If you choose to combine these strategies, make sure that you know beforehand why you're investing in a specific stock. Is your reason value or growth-driven?

Of course, these days I'm a dividend growth investor and NFLX wouldn't have made it into my portfolio because the company is not a dividend-payer.

However, even dividend growth investors can learn from this lesson. Some dividend-paying stocks are mature stocks with limited growth prospects. One should apply value investing principles when considering such stocks. On the other hand, some younger dividend-paying stocks have above-average growth prospects. One should favor growth investing principles for such stocks. You don't want to sell a great dividend paying stock just because it is growing fast and offers you lots of unrealized returns!


This article was written by Stockles, a young dividend growth investor from Norway
focusing on creating a solid dividend portfolio with quality companies.
Stockles' goal is to become financially independent before 2040 by
generating a passive income stream of about $55,000.

17 comments :

  1. Ah... that reminds me of my beginning years in the investment world. I started back in 2003 when a monkey could have become a millionaire in no time. After three years in the stock market, I made lots of money and thought it was just a simple game. Man, I still remember the first time I lost 50% of my investment on one trade back in 2007 when I thought that I could make gold out of everything. Live and learn! hahaha!

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    1. I hope Stockles will also comment, but I think we all have similar stories of when we first started!

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    2. This comment has been removed by the author.

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    3. Hi DivGuy,

      Glad you liked the post. It´s both funny and sad looking back at how many mistakes one did in the beginning. I´m just glad I found a strategy that makes me focus on something that´s easy to understand. It also takes away a lot of the pressure about always knowing what´s happening in the market. As you say, Live and Learn!

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  2. I bought NFLX in 2011 for 190 sold 3 weeks later 4 225 big run up scared me. It went up to over 240 before dropping below what I paid for it. I was happy with what I got.

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    1. Thanks for sharing, Dividendsandhobbies! That's a nice gain, especially in such a short period!

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    2. Nice gain for sure. Hard to say at that time what Netflix could be worth. 800 million users. Wow.

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  3. Great point Ferdi. Looking at growth stocks with the same lens as value stocks would be a mistake. Thanks for sharing your story.

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    1. Hi, Investment Hunting -- this is a guest post by Stockles, and therefore his story. But I'm sure many of us have similar stories to tell. I can't remember my first one, but there are several along the way that I can remember!

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  4. Swing trading is definitely not for me. I'm bad at picking growth stocks. I feel it's a safer bet for me to pick mature stocks that are paying dividend this late in the FIRE game as I've reached FI in 2015. I don't want big "growth". I just don't want to see big drop, and tech and pharmaceuticals are 2 big culprits.

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    1. Congratulations on reaching FI, Vivianne!

      I'm reading a book right now (Dividends still don't lie) that argues in favor of investing in dividend paying stocks even if you're far away from FI. The risks of speculation is just not worth the potential gains, especially as this bull market we're in is aging.

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    2. Agree Vivianne. That´s the point! It´s hard, both financially and mental to find and stay with growth stocks. I just find it easier to buy boring and safe companies that will give me a nice passive income.

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  5. Everyone has their story about the would have, should have, and could have. It's always interesting looking back on the decisions we've made. At least you advanced into understanding the market more than hunch investing.

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    1. Yes, I agree -- and learning from one's mistakes makes you a better investor in the long run.

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  6. I thoroughly enjoyed this post, and I think it makes some great points, but I humbly disagree with the conclusion implying that growth and value are mutually exclusive investing strategies.

    To quote Mr. Buffett: (https://www.fool.com/investing/general/2015/02/04/warren-buffett-forget-about-value-vs-growth-invest.aspx):

    "Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive."

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    1. Hi, catfishwizard -- I don't see the implication "that growth and value are mutually exclusive" anywhere in the article, and I don't believe that was the intent of the author.

      In fact, he mentions somewhere: "If you choose to combine these strategies"...

      Also, I think he's calling for recognizing if an investment is more growth oriented (in Buffett's terms a variable with an enormous impact) or more value oriented (...negligible impact).

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    2. Hi catfishwizard,

      Glad you liked the post! FerdiS DivGro is correct. I did not intent that. I mean that you can combine those two, but I think it´s smart to have a mental label on the purchase in which category you would put it. It makes the whole buy and hold game easier.

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