A Lesson from Netflix on The Dangers of One Chamber Russian Roulette

Hello Friends,

I don’t know if you happened to see the news yesterday regarding Netflix (symbol NFLX) so here is a recap.  Netflix shares fell 35.1% in one day making it their worst day for them going back to 2004.  The general consensus is the fall was due to the streaming giant reporting that it lost 200,000 subscribers in the first quarter of 2022 and projects a loss of 2 million global subscribers in the second quarter.  Netflix was the worst performing stock in the S&P500 (which itself finished the day essentially flat).

No one saw it coming, not even the “experts” on Wall Street, who downgraded it AFTER the stock plummeted overnight.  (Guess their crystal balls are broken too!)

The table below gives some historical perspective on Netflix’s ride from the beginning of 2018 until yesterday versus the broad market.

The problem with concentrated positions is that they can outperform for years causing people to fall in love with them only to realize that in the end they never loved you back.

One of my core investing principals is “Never own enough of one idea/stock to make a killing in it OR to get killed by it.”  This one sentence sums up my view of speculating verses investing.  It’s fine to have a concentrated position as long as if/when it blows up, it doesn’t also blow up your long-term plan to meet your most cherished goals for you and your loved ones.  The more concentrated your portfolio, the more likely it is for one idea/stock to blow it up because you have fewer “chamber’s” and at some point, one of them is going to go off.  

Now, none of this is to say that whatever stock got hammered won’t claw its way back and recover which some do.  The problem is that your plan may not be able to sustain itself and your goals while waiting for the potential comeback.  This is why from a planning perspective, if a client has (or wants) a concentrated position, we re-evaluate the odds of success assuming the position goes to $0.  If the client is still successful, then by all means, take the risk.

As always, it is a pleasure and an honor to serve you!  Please reach out to me if you would like to discuss anything further and have a great day!

Sincerely,

David Henderson

This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates.