A good example of why you shouldn’t try to pick stocks
October 14th, 2009 - 75 Comments
This is a great example of why you shouldn’t try to pick individual stocks.
Just because you can write down a top-of-mind analysis on a napkin doesn’t mean you understand a company’s financials. And remember, most professional investors — who are paid millions of dollars per year — can’t either. Investing is not about picking stocks. TELL YOUR FRIENDS THIS.
My Prognostication Failed
“Five years ago I had a friend who was sitting with Netflix stock which had increased in value by 500% when he came to me and asked for some advice: Should he sell? My response was yes based on the following criteria.
Strong Competition- Blockbuster had recently entered the fray; they had a strong competitive strength with their local stores and had plenty of money to target Netflix. I figured even if Netflix did win the costs associated with acquiring and retaining subscriptions in a competitive atmosphere would erode substantial earnings.
Digital Transition- At the time 5 years ago many were predicting a strong push to web based content delivery. It made a lot of sense and would have an impact on Netflix. Expectations were that strong players like Microsoft, Google, Sony, and Apple would crowd out Netflix.
Content Acquisition- With the digital transition I expected consumers to transition to watching web video. As such, companies interested in this market would need to negotiate new deals with the film companies. The Netflix model is somewhat disruptive and they lacked strong relationships with the film companies. This would require a hurdle that Netflix would have to overcome, which introduced substantial risk.
Increasing costs of doing business- Netflix’s primary model was based upon delivery by mail, the more customers used the service the more expensive it would become. Additionally the US Postal Service had shown an interest in continuing to increase the cost of shipping.
Business Transition- Netflix was looking to radically change their business model from mail delivery to digital delivery. It was unclear they had the Intellectual Property, or business assets to smoothly make this transition.
While these were all valid concerns at the time, Netflix has been validated. My friend sold Netflix around $10, and it’s now hovering near $45 (yes up another 500% from where he had it).”
It continually enraged me when individual investors think “investing=real estate” or “investing=picking stocks.” Even worse is when this lie prevents people from ever investing in the first place because it’s too complicated.
There is a simpler way: lifecycle funds. I cover this all in chapter 7 of my book, including picking long-term investments, automating investing, and various investments based on your appetite for risk.
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