Staying with high-flyers like NFLX through downs

Should one stay with high-flyers like NFLX through downturns?

I’ve noticed quite a number of people on the boards bragging about how they stayed with NFLX through its downturn and now it’s higher than ever. I’d like to open a discussion on whether this was actually a good policy.

In July 2011, NFLX hit a high of $303. It then started crashing for good reasons (terrible decisions by management), which certainly gave you enough warning to get out. It got to $60 by November and after a brief rise over $100, to the low $50’s a year later. It’s now back to $335.

While, if you stayed with it all the way, you’d feel some relief, this amounts to a 10% increase over an incredible 2½ years, during which many of us saw our portfolios increase by 50% to 100% if invested in MF stocks.

If you invested in NFLX under $100 say, you made a great investment, but it seems to me that if you rode it all the way down, and back up again for an eventual 10% gain, there was a lot of opportunity loss in what you could have done with the money.

Now my sentiments go against the MF philosophy of holding forever, pretty much in spite of whatever, so I’d like to see what other people think.

Saul

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Hindsight is 20/20.

Who can call the tops and bottoms? I get the NFLX example - I was one who rode NFLX from $20 to $300 to $50 to today. Would I have liked to sell at the top and buy back at the bottom? Of course! Can I do that successfully? I’m not so sure.

There’s also the psychological factor of price anchoring, “Netflix is still overvalued at $50, I’ll wait until it hits $25 before re-buying.”

Personally, I don’t like to play that game because my policy of buy and hold works for me. Am I missing out on gains? Maybe, but I know that I sleep well at night and my portfolio crushes the S&P 500 (which is my goal).

Fdoubleol

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Saul, I bailed at about $110 as it plunged. Like you I was dismayed by management’s decisions and felt that the thesis had fundamentally changed. No point in holding if you don’t have confidence in what’s going on. If the drop occurred around something significant but less fundamental to the business model (e.g. hundreds of millions of subscribers accounts hacked), I probably would have held on to it.

But I kept an eye on it since I’m a big Netflix fan and bought again at around $200 at which point I felt they’d gotten their act together and growth potential continued to look strong. In the end, my view was that if NFLX was going to come back, it would be a while and I’d be better served investing those dollars in other promising businesses.

  • Khleb

P.S. Thanks a ton for starting this board - I’m really enjoying your commentary and insights.

Should one stay with high-flyers like NFLX through downturns?

Saul, I think it’s becoming clear that you possess a talent I do not. You have a knack for sniffing out how the market is likely to react – whether to a new company on your radar that you’re thinking of adding to your portfolio, or to an event in a business you already own. You’re not right every time, but right enough to make a big difference.

I don’t have that knack. I’m regularly surprised about how the market reacts. Things that I think are big news don’t move the needle at all because they’ve apparently been priced in or the market just doesn’t care (PRLB CEO stepping down is an example – market hardly blinked; same thing when INVN ousted their founder and CEO). Things I think were obviously going to happen and therefore should have been priced in do move the stock, sometimes significantly (Apple margins dropping – management literally warned about it conference call after conference call – it was something everybody should have known was going to happen). So I have zero ability to understand a stock’s short term movements (nor the magnitude of those movements). But it’s much easier for me to determine if a decision makes sense in the long run (though I’ll be wrong sometimes, of course), and I can relax knowing that I’m likely to come out ahead regardless of what happens in the short term.

Believe me, Saul, I wish I had your knack :wink: I’m on this board hoping to get a hint of what you see. Your comment about not wanting to justify your decisions to yourself or the board lead me to believe your success is more about shrewd judgement backed by some financial rules of thumb than it is a specific process or teachable method. But I’m hoping I’ll pick up something :slight_smile:

Regardless, thank you for being so generous.

Neil

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Saul,

For momentum stocks like NFLX, I set price targets for evaluation. When the price approaches/reaches the target, I will look more critically at the market sentiment, short interest, insider movements, bear attacks, bull prods, the charts and anything else that I can to get a good feel of how people are feeling about it.

Those things are the primary movers since the company earnings are not directly supporting the price. Subscriber counts vs expectations, new content, dropping content, etc. can all move the price. For NFLX, I noted early that any buy/sell near earnings was sketchy at best.

Through selective selling and repurchase, I ended up with 13 shares for every 6 that I originally bought in 2007. I reinvested about the same amount of cash as I took out in the sales(in IRAs).

Gene
PS: I have fewer today. I gifted some shares from our taxable account original purchase to charity in December. ($21.56 to $366)

Saul:

I enjoy your posts. I have a problem with anchoring and triple digit price tags. Both with AAPL and NFLX, I was watching to buy in the $80 range but once the stocks breached the $100 price tag, I felt that I missed the boat and did not buy. As the price rises, the value that I was watching at $80, is now not as great so I kept waiting for the price to come back under $100. The psychological triple digit price vs the double digit price should not have affected me that much but it did. How does one improve on this? Thank you for your comments.

Ken

Saul, I bailed at about $110 as it plunged.

…and…

and bought again at around $200

…so by trading, you lost 90 dollars a stub…

…this is why there’s a market… :slight_smile:

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Thanks everyone for getting a useful discussion started.

I have a problem with anchoring and triple digit price tags… I was watching to buy in the $80 range but once the stocks breached $100 [on the way up I presume], I felt that I missed the boat and did not buy… I kept waiting for the price to come back under $100. The psychological triple digit price vs the double digit price should not have affected me that much but it did. How does one improve on this?

Ken,

Here’s how I handled it with TSLA. I sold out at $165, thinking it had gone just straight up and was silly, and that I wouldn’t buy back until it got to $120 or less. Of course, the stock ignored me and kept going up to $185 or so. Then it got some downgrades and started falling finally.

When it got to $140 I got itchy and dipped my toe in and bought a tiny amount (about 2% of a full position). I put in an order to buy twice as much at $136, which filled, and for four times as much (8% of a normal position) at $132. As I was buying larger quantities, I then stretched to $5 differences and bought 12% of a normal position at $127, and 16% at $122. That was 42% total.

I should have had the guts to buy a bunch when it got to $118 but I hesitated and it started back up. I bought decreasing amounts on the way up to $140 and ended up with about three quarters of a normal position (which was really all I wanted, in retrospect).

I’m not sure what TSLA will do, up or down from here, but that’s how I handled it anyway.

Saul

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Huibs, that assumes proceeds were held in a static cash account (which they weren’t). Most went to UA which has turned out well, some to OLED, not so much :wink:

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Saul, I think it’s becoming clear that you possess a talent I do not. You have a knack for sniffing out how the market is likely to react – whether to a new company on your radar that you’re thinking of adding to your portfolio, or to an event in a business you already own. You’re not right every time, but right enough to make a big difference.

Neil, I certainly don’t always get it right. I sold out of DDD nine months ago for reasons I described above (which were good reasons, I thought), and it’s doubled since. I also sold out of SSYS and PRLB a couple of months ago, because I thought the PE ratios were very high for stocks growing earnings at 25-30%. PRLB is down a few dollars from there but SSYS is up 10%. I sold out of AMZN about $230 because I just didn’t see them making a profit any time soon (that is in the next 10 years). It hasn’t seemed to bother anyone else though and the price keeps on going up.

Best,

Saul

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Khleb,

It sounds like you handled it intelligently, selling when the thesis had changed (if a little late), and waiting to buy back until they got their act back together.

Saul

Hindsight is 20/20. Who can call the tops and bottoms?

fdoubleol

I didn’t think of selling NFLX as trying to guess tops and bottoms, but selling because management had screwed up in a couple of major ways and changed the basic outlook of the stock. Then they got it fixed, but $300 to $55 is a loss of more than 80%. That required a 400% gain to get back to where they had been. NFLX pulled it off, but not many companies will! At $55 there was no guarantee at all that they would get it fixed and regain customer confidence.

Saul

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Thanks, I did the same with GRMN a number of years back - right call but my love for the company/stock unnecessarily prolonged pulling the trigger… That said, in both cases I walked with substantial returns and don’t at all regret the decisions or timing.

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Hi Neil, I’m with you on this one. The short term market movements for any stock make absolutely no sense to me many times. The huge payout by Starbucks to Kraft for a contract dispute never even touched the price even though it took most of their free cash ($2B). Much “smaller news” seems to drive some of my small stocks crazy.

I’m starting to think just buy when you find a company that you believe is great and growing not waiting for a price slump, then hold until you are convinced something significant has changed pretty much ignoring the analysts.

That is what I am going to try?

Saul or anyone have some different thoughts?

Brian

I’m starting to think just buy when you find a company that you believe is great and growing not waiting for a price slump, then hold until you are convinced something significant has changed pretty much ignoring the analysts.

Brian,

That’s exactly what I do. I’ve argued several times against waiting for a price slump before getting in. If you like it and are convinced, at least take a starter position now

As far as holding “until you are convinced something significant has changed”, I sometimes define “something significant has changed” as the price and PE ratio getting wildly high, at which point I will at least reduce my position, if not get out.

I’ll never hold off buying, trying to get a stock 15 cents or 25 cents cheaper. When it’s at $35 a share, you won’t remember or care whether you paid $10.15 or $10.40 for it.

Saul

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