Good article on NFLX

[Ballinvarosig Investors]

Warren Buffett never shots stocks. He said  that he has never been wrong on the overvaluation of a stock, but problem for shot is that it is difficult to get the timing right.

 

Pabrai has similar comment.

 

I am not smarter than Buffett and I never shot stocks.

 

That's all I want to add to this topic.

Shorting is difficult. Shorting something with momentum is even more difficult. A fund manager friend of mine lost big when he shorted a clearly overvalued housing market in 2005. Timing is everything when shorting.

 

Anyway, I just can't understand why anyone would want to short, you can only ever make 100%.

[Guest HarryLong]

Stove, as you get older, you will see crazy things happen in markets. You will see friends go bankrupt, or blow up their funds. A friend of mine even committed suicide after he went broke due to a bad investment.

 

This is really serious. Risk control is not a joke.

[Guest valueInv]

Bottom of second article.

 

NFLX is at 6 cents per GB. What's your thesis on the industry average?

That if you walked into Akamai's offices on Monday and bought 500 TB of capacity, you would get it for 6 cents or less.  ;)

 

Well, OK, now we've gone full circle. If I walked into China and had the scale of Walmart, I could negotiate hard too.

 

Hence, my point. Their scale is a competitive advantage  ;D

How many movies do you think it takes to consume 500 TB?

[Ballinvarosig Investors]

Netflix insiders have had automatic sale programs in place since the $30s.  I think that says something.

Have you answered your own question?

Myth, I used to view insider buying as paramount in a deep value or distressed situation, but I have learned that sometimes the insiders get scared too and simply can't pull the trigger.  To give you an example, I almost bought Select Comfort (SCSS) in March 2009 at $0.20 per share.  Finally, I talked myself out of it because I thought, "If this is so cheap, why aren't insiders buying?"  Less than a year later, the stock was at $10, so I would have turned $100,000 into $5 million.  Expensive lesson that says don't be too dogmatic.  Insider buying is a plus, but sometimes even the insiders don't have the guts to do what's right.

[Guest HarryLong]

I had a guy in my office a while back who I'd known for a year or two.

 

A couple of years ago, he came over and wanted to discuss an option trading strategy that a friend had come up with To make a very long story short, I took a look at it, and told him it was not viable. However, he decided to proceed with it anyway.

 

To give you context, he is a young guy, and working very hard without a lot of education he had saved up over six figures. Fast forward a year, he's in my office, totally despondent. He had lost his entire life savings, and he has to start over again. There are a lot of stories like that. It's really sad.

 

If something can happen, if you live long enough (given enough time), it eventually will.

 

If one continually engages in transactions with unlimited downside and limited upside, without risk control, one WILL eventually go bankrupt if one lives long enough.

 

The sad thing here is, if heaven forbid, a couple of guys on this thread ever do go bankrupt, they'll be thinking, "Harry's not a very diplomatic guy, but he was right. I should have listened." Only a fool needs to learn from experience. There is nothing new in markets, only the pockets change. Statistics are irrefutable. Reconcile yourself to risk control when shorting.

[beerbaron]

I had a guy in my office a while back who I'd known for a year or two.

 

A couple of years ago, he came over and wanted to discuss an option trading strategy that a friend had come up. To make a very long story short, I took a look at it, and told him it was not viable. However, he decided to proceed with it anyway.

 

To give you context, he is a young guy, and working very hard without a lot of education he had saved up over six figures. Fast forward a year, he's in my office, totally despondent. He had lost his entire life savings, and he has to start over again. There are a lot of stories like that. It's really sad.

 

If something can happen, if you live long enough (given enough time), it eventually will.

 

If one continually engages in transactions with unlimited downside and limited upside, without risk control, one WILL eventually go bankrupt if one lives long enough.

 

The sad thing here is, if heaven forbid, a couple of guys on this thread ever do go bankrupt, they'll be thinking, "Harry's not a very diplomatic guy, but he was right. I should have listened." Only a fool needs to learn from experience. There is nothing new in markets, only the pockets change. Statistics are irrefutable. Reconcile yourself to risk control when shorting.

 

Harry, at what point do you plan to exit NetFlix?

 

BeerBaron

[Guest HarryLong]

I had a guy in my office a while back who I'd known for a year or two.

 

A couple of years ago, he came over and wanted to discuss an option trading strategy that a friend had come up. To make a very long story short, I took a look at it, and told him it was not viable. However, he decided to proceed with it anyway.

 

To give you context, he is a young guy, and working very hard without a lot of education he had saved up over six figures. Fast forward a year, he's in my office, totally despondent. He had lost his entire life savings, and he has to start over again. There are a lot of stories like that. It's really sad.

 

If something can happen, if you live long enough (given enough time), it eventually will.

 

If one continually engages in transactions with unlimited downside and limited upside, without risk control, one WILL eventually go bankrupt if one lives long enough.

 

The sad thing here is, if heaven forbid, a couple of guys on this thread ever do go bankrupt, they'll be thinking, "Harry's not a very diplomatic guy, but he was right. I should have listened." Only a fool needs to learn from experience. There is nothing new in markets, only the pockets change. Statistics are irrefutable. Reconcile yourself to risk control when shorting.

 

Harry, at what point do you plan to exit NetFlix?

 

BeerBaron

 

 

 

We're systematic, so we have automatic entries and exits.

[beerbaron]

We're systematic, so we have automatic entries and exits.

 

Come on don't be so shy gives us your magic number  :)

[EdWatchesBoxing]

Shorting is always an interesting topic on this board. My only input is that if you absolutely believe in a shorting idea, consider buying puts instead of shorting. This keeps your losses finite if you are wrong. If I ever take a short position, it will be a synthetic one.

[Guest HarryLong]

We're systematic, so we have automatic entries and exits.

 

Come on don't be so shy gives us your magic number  :)

 

I would if it was just my personal position, but it's not, so as a fiduciary I can't.

[Ballinvarosig Investors]

We're systematic, so we have automatic entries and exits.

 

Come on don't be so shy gives us your magic number  :)

Just invert what he has said. If I've read correctly, he'll ride this stock until the growth slows. The beauty of his strategy is that he should be able to sell at a little below the peak price (some day a 10q will come out with numbers that aren't so hot); assuming that he has the discipline to recognise this turning point (not trivial).

[beerbaron]

No problem Harry, I was just trying to understand what is a growth valuation. An honest person answer, "I won't answer that questions". And I respect that.

 

BeerBaron

[jasonw1]

I just want to say whatever the discussion may turn out to be, Harry, T-bone, please don't take it personal, stop posting or leave the board. IMO your debate is truly valuable and they make the board balanced and great

 

I've learned to appreciate difference in opinion and heated discussions more and more in recently years. They may not be pleasant but they are extreamly valuable and make you think the "blindspot" you may not be aware of. Having everyone agree with you doesn't make you better or help you make money, by nature if you want to make outsized returns you will have a lot of people, aka market/general public, disagree with you.

 

There are quite a few people left/banned from the board now, including RickV recently, I actually miss the heated discussions and the points they brough up, even more so for the additional insights other members brought up (I don't think coc would have posted as much without being pushed on the button). Though I sure wish people could stay a bit more objective and civilized while having the debate.

 

So please keep posting, debating, and don't take it personal! 

[twacowfca]

Netflix insiders have had automatic sale programs in place since the $30s.  I think that says something.

Have you answered your own question?

Myth, I used to view insider buying as paramount in a deep value or distressed situation, but I have learned that sometimes the insiders get scared too and simply can't pull the trigger.  To give you an example, I almost bought Select Comfort (SCSS) in March 2009 at $0.20 per share.  Finally, I talked myself out of it because I thought, "If this is so cheap, why aren't insiders buying?"  Less than a year later, the stock was at $10, so I would have turned $100,000 into $5 million.  Expensive lesson that says don't be too dogmatic.  Insider buying is a plus, but sometimes even the insiders don't have the guts to do what's right.

 

I took a very close look at Select Comfort, beginning about two years before the stock reached it's low point.  It was interesting because they didn't have debt going into the recession, but they did have lease payments to make.  the problem was that they had very little cash.  As the recession wore on, they started borrowing money.  It got to the point where they couldn't borrow more from conventional sources.  Then, a group stepped up to provide funds to keep them out of cpt 11, but there was a heavy price to pay: a recapitalization plan that kept them out of Cpt 11,but took away the great majority of the equity from the shareholders.

 

By this time,  the stock was selling for pennies, and the shareholders sued to block the deal.  This is where the buying opportunity presented, but I lost track of the case with the markets going bonkers.  I think what happened was that the case got strung out for a few months and their business started to make a recovery.  At the same time, the financial markets improved.  The management realized that they now had alternatives that wouldn't greatly dilute shareholders.  If I or anyone else had taken the time to closely monitor their situation this could have been a fifty bagger without taking great risk.

[bargainman]

I think the points regarding risk control on shorts are very valid points.  What's the old statement "the markets can stay irrational a lot longer than you may be able to stay solvent"?  As investors with a clear value leaning, we can get so focused on business risk that we forget about or minimize quotational risk.  Quotational risk is pretty important from a shorting perspective.  I also find it interesting to see a modified value style.  Basically it seems to me like Harry does look at value but won't necessarily sell when the business reaches intrinsic value.  it seems like he has some kind of momentum stop or trailing stop that lets him get out if the stock loses it's momentum.  Or maybe it's an asset allocation guideline (sell some whenever it becomes > 5% of the portfolio)  Of course the danger in that is that when momentum stocks fall, they can fall hard.  You can get earnings drops and PE multiple contraction in one go, and then the trailing stop can mean nothing.  For those interested, there is an interesting study floating around called the "Capitalism distribution" it's a study on a momentum based system which proves quite successful and shows that the vast majority of market gains come from stocks continuing to make new highs.  People may not be interested in it since this is a board dominated by value focused investors, but it's important to learn as much as possible imho.

[twacowfca]

Warren Buffett never shots stocks. He said  that he has never been wrong on the overvaluation of a stock, but problem for shot is that it is difficult to get the timing right.

 

Pabrai has similar comment.

 

I am not smarter than Buffett and I never shot stocks.

 

That's all I want to add to this topic.

 

 

Yeah he did.  Early on, he and Charlie went to some universities and asked to borrow their shares.  When they were able to do this, they shorted the whole basket of stocks because they thought the market was getting overvalued. This was before it was possible to short the S&P500.

[Myth465]

WHats funny is Harry and Marty Whitman have the same rules for selling. Marty said his stocks have gone up 100% and he has sold and then it goes up 200% more, for the momentum guys. He will now no longer sell unless its grossly overvalued as long as he doesnt need the cash.

 

http://www.gurufocus.com/news.php?id=1182

[Eric50]

There is a really good book that was published in 1999 called the “The Gorilla Game: Picking Winners in High Technology” by G. Moore – I just reread some sections of that book. The main thesis is that one can make a lot of money investing in hi-tech companies that dominate their segment. Their architecture/model becomes the standard and they exploit this standardization, the network effect  and the high switching cost to grow quickly, increase their market share and dominate their industry. These companies are the gorillas and they have huge growth potential for investors.

 

I think Netflix might be such a gorilla. They are exploiting the streaming/subscription model and pushing aggressively in order to dominate their growing market.

 

Some on this board have mentioned low switching costs and I disagree with that. Once people are used to get a decent (and increasing) choice of streaming videos, they are unlikely to change providers. I have four children and they watch all their kids’ shows on streaming with a Roku. We are not going to switch anywhere else in the near future: there is no good alternative for the same price and the switching costs are high (unhappy kids…).

 

We are also in a Bernanke put area with super low interest rates that are feeding the speculation… Remember amazon and Henry Blodget in the late 90s.

 

[twacowfca]

WHats funny is Harry and Marty Whitman have the same rules for selling. Marty said his stocks have gone up 100% and he has sold and then it goes up 200% more, for the momentum guys. He will now no longer sell unless its grossly overvalued as long as he doesnt need the cash.

 

http://www.gurufocus.com/news.php?id=1182

 

This is not a bad strategy, according to studies.  The best time to buy a P/B value stock is after underperforming for about three or four years and getting knocked down to a very low level compared to its previous high. Typically, a basket of such stocks will  start to creep up then, but this is still not quite the period of highest percentage returns.  Among such stocks, will be some that are beginning to see an improvement in their financial ratios. When these start to creep up, momentum will, on average begin to increase.  When this happens, that is the time for maximal returns.  

 

Harry's account of letting such winners ride well above IV also works, but generally only when the market is bullish.  Otherwise, this is not generally a superior strategy.  When we do this, we use Sornette's fractal analysis on both the market and that stock to determine an optimal exit point.  Thus, on the previously mentioned coup against the short sellers of FFH in 2006, the fractal analysis indicated that the bubble in short covering would probably pop when FFH approached a little above the $200/sh level. The pricing premium in the options market supported this thesis.  Most of the abnormally low premium that existed for FFH calls disappeared and the prices of these options normalized as the FFH common price approached $200.

 

  We exited more than half our position in the neighborhood of $185 to $195 ( I'm actually conservative even though we sometimes get into some hairy ( no pun intended ) situations.)  :) We sold some of the remainder in the low $200 range and kept a few leaps for a 12 month+ hold for an even greater long term gain.

 

[Sea Island]

Minds are like parachutes, they only function correctly when they are open--J.T.

 

Not to pick a fight with the late, great John Templeton, if Harry is quoting accurately, but part of a parachute's functionality is that it can be packed in a confined package when desired. Its ability to be closed is integral to its functionality.

 

Harry I am interested to know what your role as a fiduciary has to do with stating an exit price for your Netflix investment?

 

[Cardboard]

There seems to be an assumption in this thread that Harry is just letting NFLX ride up well beyond his IV number. I am not sure if he will comment, but I don't think that is the case since he sold his Salesforce.com. It is true that momentum in CRM shares seems to have slowed in recent days, but it is still in an uptrend, sales are still growing and there has been no filing or announcement indicating the opposite. So I guess that he could have held on if he just relied on momentum.

 

Now, calculating the IV of NFLX is not easy for a long or a short. There are so many moving pieces at a very rapid pace that predicting cash flows with a high degree of certainty over the next, say 5 years, seems impossible. The high near term P/E vs near term seen growth seems to favour a short, but who knows what the earnings model will be exactly in 2 or 3 years.

 

So as long as sales are growing at the current pace, I think that shorting is highly dangerous since we won't know the eventual earnings of this business for a few years. As a reminder, they missed their earnings on the last quarter and see what happened with the shares. Unless there is some really bad news to shake investors confidence a la 2008, it seems to me that the shares may remain high.   

 

NFLX could end up with 50 million subscribers in 3 to 4 years. They charge $9 a month. With some decent margins that could mean a lot of profits and it does not say what else they may offer by that point and the extra dollars that may come in. It could become quite sticky and difficult to do business with anyone else but these guys. I understand the "squeeze" argument by content and delivery players, but it just seems to me that they are nothing without this intermediary. They will be quite happy to stick with them if they keep adding more and more subscribers.

 

I had some puts on NFLX, lost money and I have given up. I thought it was quite ahead of itself, but also realized that the longs may end up right with enough time. Some short term event may have worked for me or a return to a show me attitude by investors, but that is all it is. Seeing no real breakdown in the business model told me to get out of there.

 

Cardboard

[manualofideas]

I fear that even on this Board we are getting suckered into Keynes's "beauty contest."  The only question for us regarding Netflix should be, "Would I want to pay $8.5 billion to buy all of Netflix?"  Everything else, i.e., whether the stock was up or down last week or is accelerating in some fractal-type way, is noise.

[rmitz]

I fear that even on this Board we are getting suckered into Keynes's "beauty contest."  The only question for us regarding Netflix should be, "Would I want to pay $8.5 billion to buy all of Netflix?"  Everything else, i.e., whether the stock was up or down last week or is accelerating in some fractal-type way, is noise.

 

Unfortunately, the answer to that isn't all that clear cut.  Private business purchases *do* still have to take growth rates into account. There's a lot of unknowable moving parts and factors in here.  Personally, I'm no where near either side on this one.

[Eric50]

Article in the NYT today on NFLX facing more competition online.

 

http://www.nytimes.com/2010/09/27/technology/27netflix.html

[twacowfca]

I fear that even on this Board we are getting suckered into Keynes's "beauty contest."  The only question for us regarding Netflix should be, "Would I want to pay $8.5 billion to buy all of Netflix?"  Everything else, i.e., whether the stock was up or down last week or is accelerating in some fractal-type way, is noise.

 

Unfortunately, the answer to that isn't all that clear cut.  Private business purchases *do* still have to take growth rates into account. There's a lot of unknowable moving parts and factors in here.  Personally, I'm no where near

Neither side on this one.

 

 

 

 

Let's assume that the only value of a business will be its terminal value (or liquidation value) plus the dividends it throws off during its lifespan. Also assume that the owner or his heirs will not be able to sell the stock until the company no longer exists as a going business and its remnants or pieces are liquidated or reorganized in bankruptcy.

 

This perspective shows that the value of owning the most profitable business in the world for many years, GM, would have been merely the value of its dividends and the value of the few spinoffs that are still going concerns. To simplify, let's think of those spinoffs as having been special dividends. Interestingly, if that stockholder had reinvested his dividends in GM, including the value of the special spinoff "dividends", the compound value of his investment would have been zero.    

 

This leads to a couple of potentially profitable ideas, profitable in the sense of avoiding loss.  It's not a good idea to reinvest all dividends and own a company until its eventual demise. It's also not a good idea to own a company that has to reinvest all or nearly all of it's earnings during its most profitable years merely to keep its spot as the leader of the pack because its business eventually will fail, just as GM failed.

 

Murphy's Law:  If it can fail, eventually it will fail.

 

(Yes, Virginia.  There really was a Murphy.  He was an engineer.)