Good article on NFLX

[Guest Bronco]

Harry - perhaps you can list some of your favorite methods of risk control.  I may be making a stretch, but it seems like you have built a love/hate following on this board.  For those that are interested, I think it would provide some great insight.

 

For example - do you limit your positions to a certain % of capital?  will you sell an investment down 5%, 10%, 15%?  I know you probably use more sophisticated tools than most - do you have a favorite set of metrics?  Micro vs. macro? 

 

Maybe we can spark some intelligent debate on these issues - although forgive me if they have been already discussed on this board. 

[Guest HarryLong]

Now is the time to short Netflix. It's way way overvalued. And the quietness on this thread confirms that...

 

Eric50 is another distinguished prophet, Junto.

 

Normative reasoning or prophecy is not enough. You need to have a plan if you're wrong. Otherwise, you get stuck in the T-bone / Stove watsa_is_a_randian_hero confirmation bias whirlpool where no one can reach you, even if they read you aloud quarterly reports in an effort to bring you back to reality  ;D

[Guest HarryLong]

Harry - perhaps you can list some of your favorite methods of risk control.  I may be making a stretch, but it seems like you have built a love/hate following on this board.  For those that are interested, I think it would provide some great insight.

 

For example - do you limit your positions to a certain % of capital?  will you sell an investment down 5%, 10%, 15%?  I know you probably use more sophisticated tools than most - do you have a favorite set of metrics?  Micro vs. macro?  

 

Maybe we can spark some intelligent debate on these issues - although forgive me if they have been already discussed on this board.  

 

Bronco, amazing question.

 

I've come to the conclusion that people hate to correct their mistakes and that the refusal to adopt risk control is a psychological coping mechanism which enables (much like an enabler with an addict) people to continue to engage in self-delusion.

 

Refusing to consider risk control is, at its heart, a primitive psychological defense mechanism, which like all psychological defenses, does more harm than good.

 

I think the intelligent lay person can create a pretty good risk control system using good sense.....

[Junto]

And yes, making money starts and ends with risk control. I'm glad you can see the future in the coming three months (maybe you can, who knows?). If you're wrong, I hope you have a plan to get out.

 

Always do; what kind of investor would I be if there is not a point pre-entry I am willing to sell at for both a gain and a loss? Not a big position in this stock, so overall risk of loss is minimal across my portfolio. Risk/Reward characteristic looked promissing from my analysis.

[Guest HarryLong]

And yes, making money starts and ends with risk control. I'm glad you can see the future in the coming three months (maybe you can, who knows?). If you're wrong, I hope you have a plan to get out.

 

Always do; what kind of investor would I be if there is not a point pre-entry I am willing to sell at for both a gain and a loss? Not a big position in this stock, so overall risk of loss is minimal across my portfolio. Risk/Reward characteristic looked promissing from my analysis.

 

Glad to hear it. I guess you are interested in risk control after all  ;D

 

I'll take all the converts I can get  ;)

[turar]

Harry, you never answered Bronco's question...

[Eric50]

Personally I own long term put options on NFL. It is one of the most overvalued stock that I have ever seen. I started to buy them when the stock first reached $200. I might buy more soon.

 

In terms of risk control, it's about 1% of my total portfolio. I might go higher in percentage of total portfolio if I see an end to QE2 (it's very dangerous to short in a money printing environment) or if I see a short term catalyst.

 

This is clearly an overvalued stock and we all know that it's going to tank somehow in the future. The question is when. Without a catalyst and with an insane policy at the Fed, it's a very dangerous environment for the shorts. But time will come and then I think we'll have some amazing short opportunities.

 

Eric

[Guest Bronco]

Eric - I wish you luck on the trade, and to be clear, it is not for me.  But in the context of this thread, would you allow the 1% of your portfolio become 3% of your portfolio?  In other words, at what level (UFC term coming) would you tap out.

 

Whether or not NFLX is overvalued now - I don't know.  I do agree that there will be many competitive forces...cable, apple, sears (somewhat joking), amazon, etc...

 

That said, the unlimited Dora and Barney episodes are worth the $10/month to any parent that needs 30 minutes of silence.

[Eric50]

In a non money printing environment and with a ST catalyst I could be very aggressive and go up to 5% of total portfolio. But this is unlikely to happen soon as the Fed is printing like crazy and is unlikely to end soon (Bernanke hinted in December in 60' that he'd be ready to start QE3...). I don't see a short term catalyst with NFLX itself yet but I believe we might have one in the summer as they have to renegotiate their streaming catalog.

 

Eric

[Guest HarryLong]

Harry, you never answered Bronco's question...

 

Turar, as you can imagine, our systems are proprietary trade secrets. We've spent a great deal of time, money, and effort developing them, and I won't share them without licensing agreements in place. I didn't want to get in to that, but since you point out I'm avoiding sharing....

 

As I've said before, the intelligent lay person can create satisfactory risk control systems using good sense. They may not be institutional strength, but they can be a vast improvement over no risk control.

[bargainman]

Now is the time to short Netflix. It's way way overvalued. And the quietness on this thread confirms that...

 

Eric50 is another distinguished prophet, Junto.

 

Normative reasoning or prophecy is not enough. You need to have a plan if you're wrong. Otherwise, you get stuck in the T-bone / Stove watsa_is_a_randian_hero confirmation bias whirlpool where no one can reach you, even if they read you aloud quarterly reports in an effort to bring you back to reality  ;D

 

Harry, I really don't know why you keep pounding on this, or at least on watsa.  He clearly delineated earlier in the thread what his risk control mechanism was.  Very small short position vs portfolio size, followed by a closing of the short and conversion into a bearish vertical put spread when it moved against him.  (ie *closed out his unlimited risk*).  That hardly seems out of whack or 'refusing to adopt risk control'.  I really like the ideas you bring to the board but I think you overdo these kinds of posts sometimes.  Plus the fact that you aren't willing to share your proprietary risk control methods, while you pound on others' who have shared what they do for risk control seems asymmetric. 

[Guest HarryLong]

Now is the time to short Netflix. It's way way overvalued. And the quietness on this thread confirms that...

 

Eric50 is another distinguished prophet, Junto.

 

Normative reasoning or prophecy is not enough. You need to have a plan if you're wrong. Otherwise, you get stuck in the T-bone / Stove watsa_is_a_randian_hero confirmation bias whirlpool where no one can reach you, even if they read you aloud quarterly reports in an effort to bring you back to reality  ;D

 

Harry, I really don't know why you keep pounding on this, or at least on watsa.  He clearly delineated earlier in the thread what his risk control mechanism was.  Very small short position vs portfolio size, followed by a closing of the short and conversion into a bearish vertical put spread when it moved against him.  (ie *closed out his unlimited risk*).  That hardly seems out of whack or 'refusing to adopt risk control'.  I really like the ideas you bring to the board but I think you overdo these kinds of posts sometimes.  Plus the fact that you aren't willing to share your proprietary risk control methods, while you pound on others' who have shared what they do for risk control seems asymmetric. 

 

 

Where do I begin? The gestation of the Stove, T-bone, Watsa_is short position was a fundamental view of the competitive environment, with an explicit focus on margins going forward as competition "increases" in their view.

 

Margins, to the contrary, went up.

 

So this is not about price movement. This is about confirmation bias. If the very reason one puts on a short does not occur, and to the contrary, the opposite occurs, one is not fully experiencing reality.

 

"When the facts change, I change my mind. What do you do, Sir?"

--Keynes

 

 

 

 

[RichardGibbons]

I think this is a probably a straw man, Harry, though I'm not going to go through the whole thread to confirm it.  As I recall, none of them implied that it was a short-term bet on the results of a single quarter.  It would be pretty unusual if someone on the board said that their premise rested on this quarter.

 

They will be proven right or wrong over the course of years, when NFLX tries to renew the license on their content and finds it's five times the price, and the telcos, cable companies, Amazon, and the odd tech company all start jumping into the game.

 

Also, it seems somewhat odd to me that you're not changing your mind about their risk-control strategy when they've pointed out their risk control strategy.  Haven't the facts changed?

 

That said, I think you're 100% right that risk control is a good thing.

[ragnarisapirate]

Amazon is jumping in... It seems like margins will eventually be decreasing for NFLX over time, with added competition.

 

http://finance.yahoo.com/news/Amazon-to-launch-film-rb-4008883978.html;_ylt=Ahqcgain8LHy.DftbBAbbGS7YWsA;_ylu=X3oDMTE2ZHFmZnFqBHBvcwMxMgRzZWMDdG9wU3RvcmllcwRzbGsDYW1hem9udG9sYXVu?x=0&sec=topStories&pos=9&asset=&ccode=

[rkbabang]

Facebook Could Turn Netflix Into $400 Stock, Says Jim Cramer

 

I don't think Netflix is going to trade at $400 anytime soon, but crazier things have happened.  I do think it is nuts to short a stock like Netflix though.  It will go down eventually and trade at a reasonable valuation, but maybe it will go up until you loose your shirt first.

 

--Eric

 

[Myth465]

Even Tilson is starting to get it.

 

T2 Partners January Letter - Eating Some Humble Pie On Short Selling Mistakes

 

Stock selection

 

Over time we’ve been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where we have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst.

 

Netflix

 

Since we first wrote to you in December about our Netflix short position, we have received quite a bit of new information including results from our survey, input from investors, and the company’s recent earnings release. We are still digesting this information, which has both bullish and bearish implications, and will write to you about our conclusions in the near future.

[mhdousa]

They've covered their short position:

http://www.valueinvestingletter.com/pdfs/Why-We-Covered-Our-Netflix-Short-T2%20Partners-2-9-11.pdf

 

Even Tilson is starting to get it.

 

T2 Partners January Letter - Eating Some Humble Pie On Short Selling Mistakes

 

Stock selection

 

Over time we’ve been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where we have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst.

 

Netflix

 

Since we first wrote to you in December about our Netflix short position, we have received quite a bit of new information including results from our survey, input from investors, and the company’s recent earnings release. We are still digesting this information, which has both bullish and bearish implications, and will write to you about our conclusions in the near future.

[Guest HarryLong]

Not sure, not interested in whatever that was Harry. I am also about making money. Honestly this is a short term short for me. I see a pull back to under $200 in the coming three months.

 

 

How's that "short term" short coming for you? Up 7% today  ;D

 

 

[Guest HarryLong]

Also, would T-Bone, Stove, Watsa, and Eric50 care to give us an update on their positions? I think we would all like to hear from the prophets themselves.

 

Second, T-bone and Stove especially, have any of you adopted risk control, as I have suggested, or are you still in the throes of confirmation bias?

[Parsad]

Guys, please stop being dicks to one another, otherwise somebody is going to have to go.  Cheers!

[merkhet]

Harry,

 

I don't really have a dog in this fight, but since it's the internet and that's never stopped anyone on the internet before, I'm throwing in my two cents anyway.

 

I think you have a lot of really great ideas.  However, often times when I see what you write on this board, I can't help but think back to The Last Lecture by Randy Pausch.  In that lecture, Randy relays the story of talking with one of his mentors at Brown University who told him that "Randy, it's such a shame that people perceive you as so arrogant, because it's going to limit what you're going to be able to accomplish in life."

 

When you write to ask "the prophets" whether any of them have "adopted risk control, as [you] have suggested" or whether they are "still in the throes of confirmation bias," you have to know that in addition to perceiving that you are helping them unwind an unprofitable trade, you are also needling them on.  And in needling them on, you have to know that you're forcing them to choose between (1) announcing that they're sticking with the trade (unwise IMHO) or (2) suffering the embarrassment of saying that they might have been wrong to someone with which they have some bad blood.  (From what I've read of your writing, you're a smart guy, and you've studied enough Cialdini and Ariely to know all of this.  Why stack the behavioral psychology against people listening to your advice?)

 

I guess what I'm trying to say is that you can advise or you can provoke, but it turns out you can really only choose to do one at a time effectively.  (Plus, given the post above mine, it looks like choosing the latter would not be wise.)

 

In any case, I hope you find a way to stick around.

 

Best,

Rob

 

[And yes, I know they needled you too throughout this thread, but honestly, each and every one of us on this board is too old -- i.e. past schoolyard age -- to push back just because we are so pushed.]

[Junto]

Not sure, not interested in whatever that was Harry. I am also about making money. Honestly this is a short term short for me. I see a pull back to under $200 in the coming three months.

 

 

How's that "short term" short coming for you? Up 7% today  ;D

 

 

 

Already out. Perhaps you need to reread my post regarding my risk control ;) I don't post good returns through tough markets by not following a plan.

 

 

 

[valuecfa]

Also, would T-Bone, Stove, Watsa, and Eric50 care to give us an update on their positions? I think we would all like to hear from the prophets themselves.

 

Second, T-bone and Stove especially, have any of you adopted risk control, as I have suggested, or are you still in the throes of confirmation bias?

 

Let's try and not turn this into a dick measuring contest, or it will soon turn this place into Yahoo message board. I enjoy reading what one of those "prophets' has to say, too bad he rarely chats here anymore.

[watsa_is_a_randian_hero]

Also, would T-Bone, Stove, Watsa, and Eric50 care to give us an update on their positions? I think we would all like to hear from the prophets themselves.

 

Second, T-bone and Stove especially, have any of you adopted risk control, as I have suggested, or are you still in the throes of confirmation bias?

 

My position hasn't change since I last posted.  I have a put spread that expires in 2012, entered into when the stock was at 170-180.  Loss was limited to that put spread.  I have no remaining exposure to NFLX.

 

I'm not sure what your reason for posting that is since supposedly all you cared about before was "risk control," and not whether the stock actually went up of down, when I clearly stated I used position size limits and put contracts to limit risk.  

[Eric50]

Still holding my 2013 put options.

 

Eric