Netflix – The Best and Worst Investment I Ever Made

As a professional investor, the only thing worse than making a bad call is making a great call and not knowing why I did it. That’s odd, you might say, because if I make money with a stock, how could that be bad? In fact, with one particular stock purchase, I made a couple of million dollars for my clients within a two-month period. The stock was Netflix (NASDAQ: NFLX), and it was one of the best investments I ever made. But it also exposed a glaring deficiency in my investment process – namely, that I didn’t have one. As a result, I left millions more on the table after the stock went on to gain another 4000% (no, I’m not exaggerating, it literally went up another 40X after I sold it).

That was in 2011, a time in which I primarily counted on my contrarian instincts to inform my investment decisions. I wasn’t just shooting from the hip back then. I did my due diligence on the stocks I selected and managed to achieve solid returns for my investors. But, if I had followed the process I now use, we might be having a completely different conversation. Here’s some background on my Netflix investment experience.

How Netflix Became My Best Investment Decision…

In the early 2010s, I was a Netflix user, and I loved it. At the time, they were transitioning from DVD rent-by-mail service to a streaming service. While they were transitioning, the company made a series of sizable gaffs – some were operational, and some were just bad PR. This created some doubt in the minds of investors who then hammered the stock mercilessly. Between July 2011 and September 2012, the stock lost more than 80% of its value.

As I watched the stock plummet, I thought investors were out of their minds. It had been a great business when it was mailing DVDs, and, although it was still early, I thought it would be a great business in the streaming era. It had already killed off one of its biggest competitors in Blockbuster. So, being the contrarian that I was, and following Peter Lynch’s creed to “invest in what you know,” I researched the company. I found enough fundamentally to determine that Netflix was a good investment at the time.

I bought the stock across all of our client accounts – a few million dollars’ worth. That was a big deal at the time because, up to that point, we had never made wide-scale stock purchases. Other than my research, we didn’t have a process or any plan. But I was convinced this was going to be a great investment. Well, lo and behold, the stock gained more than 70% in just about two months.

…And My Worst Investment Decision

For most investors, that’s a once-in-a-lifetime experience. You don’t see gains like that except maybe with a lucky penny stock purchase. But this was an established business in a burgeoning industry. So, I did what any professional investor would do – I freaked out. Why? Because I had no process or plan. This investment far exceeded any expectations I might have had. I might have felt better if the 70% gain occurred over two to three years. But two months? So, I sold it. At least we pushed the sale into the next tax year to delay the impact of the substantial capital gain on our clients.

We were pleased to be able to tell our investors that the investment made more than $2 million for our portfolios. We patted our backs for getting in “early,” beating the hedge funds that eventually loaded up on the stock after it had gained more than 20% after we got in. But soon, the reality set in. If we had a process or an investment framework – the same framework we now use – and the confidence that comes with it, we probably wouldn’t have been on the sidelines watching Netflix become the best performing stock of the decade with a more than 4000% gain.

Why Netflix Was a Mistake I Will Never Make Again

My Netflix experience turned out to be a cruel paradox in the world of investing. It was both my best investment decision at the time and my worst investment decision, probably ever. Many people with a similar experience might spend the rest of their lives kicking themselves and trying to compensate by thinking they can jump on the next Netflix. However, as a professional investor, I had to know why it happened, so I would never make that mistake again.

Specifically, I needed to have a better understanding of how to value a company to know when to buy it and when to sell it. I needed a robust framework to guide me through a process that refines itself with every investment decision – good and bad. Once I built that framework, I found an investment analyst in Frank Corbett, a veteran with the expertise and insight that enables us to drill down into a company to determine its value today and its growth prospects for the future.

In my next blog post, I will delve into our framework and the invaluable role Frank plays in our team-based approach in identifying great companies that make great investments.




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