Anirban tells us about this big Netflix investing mistake.
September 3, 2021
Investors love to talk about their exploits of the good kind. One’s where we made tonnes of money or found a big winner early. In a profession where only a small percentage of stocks beat the market, it makes sense that stock pickers talk about their successes. And wins matter more than losses because of the potential asymmetry one gets from bagging multibagger stocks. After all, the upside is theoretically huge while the downside, at max, is 100%.
But I digress.
I want to outline a mistake I made, one that cost me a fair chunk of dough!
In 2012, I had the good fortune of picking up 420 (this has nothing to do with Elon Musk’s running fascination with 420!) Netflix (NASDAQ: NFLX) shares for a little under $8 per share, $7.97 per share to be precise. Those are split-adjusted numbers for sticklers.
This was after the big Qwikster debacle. Netflix was bringing movies and TV shows to our living rooms. It was a huge market opportunity, and Netflix was the de facto leader. The stock price was probably depressed to a large extent because of the various missteps around that time. And then, Netflix stock took off. And boy, did it rocket.
I had a 3x increase in less than a year, and it was nerve-wracking. So, I sold a third of my holdings, or 140 shares, for around $23.56 each. I had got my invested capital back. I was now riding on “house” money. But that “house” money idea is always a fallacy. House money be damned! My portfolio is mine, and everything in it is mine. Anyways, I thought I could let the rest ride.
I was spooked by the rise and wanted to take some chips off the table. Yet, it got crazier, and by late 2013 I had sold another 140 shares, this time for $41.97 each. That’s a 5-fold (or 5-bagger) in a year and a bit. As I write this, Netflix is trading around $522. So those shares that were sold around $23 and $42 effectively missed some serious compounding opportunities. The entire lot would have been worth $219,000.
What’s my point?
Selling path-breaking bleeding-edge companies early generally tends to be a mistake. Indeed, selling because one’s spooked by rapid share price gains is not ideal. Of course, from a return perspective, it matters how those funds from the sale were reinvested. I haven’t done the specific calculations, but I did have some good buys around that time, so maybe I am not that far off on a net basis. Still, letting winners run is a straightforward approach. It allows compounding to weave its magic, and one doesn’t have to pay the taxman because there hasn’t been a sale!
This is a story. One instance. I remember it because it worked out one way. I might not have this level of recall if Netflix had delivered middling returns. So there’s some bias there. But still, I believe sitting still is not easy. Our minds are wired to act. A Warren Buffett quote perhaps sums this up best:
We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.
Bottomline: It pays to have a process. It is worthwhile honing and refining the process. Thinking carefully about buy decisions and double thinking sell decisions is one way to have less activity and potentially much better long-term returns.
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