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The Netflix Debacle (and lessons)

Updated: Oct 21, 2022

Today we’re talking Netflix, Netflix just had this horrendous, horrendous week last week. And they basically warned, they’re losing all kinds of subscribers, because you know, everybody’s going back to work, right? And so, if everybody is going back to work, they’re going to make fewer numbers. Then Netflix came out with this brilliant idea where they said, “You know what? We’re going to crack down on Password sharing.” If you’re a family, and you got five people and you’re all over the country, maybe your kids are at university or whatever, and you’re sharing passwords, well, they’re going to put a stop to that. So, they’re going to start to crack down on that probably using IP addresses or something like that, to figure out a way to make sure that you’re not sharing the same password and only having to pay $12 a month or whatever Netflix charges these days. 

So, you have got to watch out for that, because that’s what’s coming up. But you know, what’s going to happen? There’s so much competition, this is why I always tell people that a stock really has its heyday for about 18 to 24 months, and then competition comes out. So now there’s Disney+, which has problems of its own these days. And then you’ve got all these other streaming services; you’ve got Hulu and Roku, and all these streaming services are competing with Netflix now. So, Netflix has to continue to innovate, continue to produce content, continue to produce information that people want. And everybody else is doing the same thing, right? 

Can you imagine nobody watching Disney anymore? So, people are going to stream Disney plus, it’s going to be a major competitor to Netflix, you’ve got all kinds of competitors to Netflix. In fact, in my situation, I just got rid of all of my cable, I got rid of the Dish Network. And I got rid of, you know, any cable that I had, because now I can just stream it. 

All right, and I have Netflix, and I can get rid of it. And I could use Amazon Prime, which comes with my Amazon Prime. And the videos are included in that. So, there’s lots of different choices out there. 

Now, let’s just talk about the stock for a second, the stock just got hammered this week went down like 150 points. So, it went down to like 25-30, I think maybe even 35%?! Actually, now this is a stock that was $700, just a few months ago and now the stock is hovering around $225. So, you know, people think well, “you know, I’ll just buy and hold the stock.” Well, it’s called buying and hoping right? If you buy and you hope, and you wait for that stock to recover. Sometimes the stock never recovers, or it’s dead money for 10 years while you wait. 

And so, in Netflix’s case, if you got out smart. If you got out last quarter when they gave a warning about this quarter, smart.  If you stayed in, tough to make a decision, right? So, what’s going to happen at this point, I don’t know? I can just tell you that there’s this guy, Bill Ackman. And Bill Ackman is supposedly one of the most successful hedge fund guys out there. He’s a billionaire, good looking guy with gray hair. And all he does is make really bad decisions. And people just keep throwing money at him. So, I remember a few years ago, I followed him into this one trade. And it was a pharmaceutical company that he was involved with. And this was a pharmaceutical company that was buying Bausch and Lomb and a few other things. And this thing just tanked. And it kept continuing to Tank and Tank and Tank and Tank. And finally, he just threw his hands up and he sold at the bottom. And this guy has continually made bad decisions. But for some reason, I don’t know what it is, people keep throwing more money at him. So, he lost $430 million on this trade in Netflix. And then he finally said, “You know what? It’s time to admit I was wrong”. He was only in the trade for three months. And he just got hammered for $430 million dollars. 

So, there’s a couple of lessons; number one, stocks don’t go up forever. Number two, get out of a stock, kill the monster when it’s small. Don’t wait until it becomes this huge loss. Keep your losses small. It’s a big lesson. Third, right now, as we make this recording, we’re in a bear market, which means stocks are selling off. So anytime there was a winner in the past, especially in the technology sector, they’re using those sectors to raise cash, right? So now people are selling those off. And they’re putting money into other things that are a little bit more hot. Things like defense, things like banking, because interest rates are going up. Other things like those things that have supply chain issues, that once the supply chain issue chain issues are resolved, those will go back up. So, there’s a lot of different opportunities. But if you just are tunnel vision, you stay with one thing because that’s the one thing they told you, well just buy it and hold. You don’t want to be out of a market when the markets are going the wrong way, then you’re going to be making a big mistake. So, you have to be nimble. There are periods of time where buying hold works, there’s no question about it. And you know, if you’ve got a 20-year horizon, it’s probably going to work for you, why? Because we are in an inflationary environment where we keep debasing the dollar and therefore anything that’s valued in dollars, right? The dollars that denominator and a dominator is reducing its value, and even its value in those it’s going up seemingly. So, during periods of time long periods of time that continues to happen. But what if you don’t have 20 years? What if you have to live on your retirement for the next 10 years and you have to start pulling money out, you can’t wait for some of these things to recover. So, you got to keep your losses small, let your winners run, but you also have to weed the garden, right? So sometimes there’s weeds in the garden, you can’t just look and say; there’s no weeds. We were a buy and hold investor, we’ll just wait. Why not take that money out, put it in something that’s going up. And easier said than done, right? But at least something that has the probabilities on your side of what’s going up. And then you know, try to continue to make money even during that period of time where you would have had dead money sitting in other stocks, like Netflix. So that’s the warning. That’s the lesson from Netflix from this week. Hope it helps you.

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