Greedy When Fearful

Everyone should own some individual stocks for one reason: They will give you freedom.

My goal is to get my expenses down to the poverty level. Most people spend more the more they make. I am on a path to do just the opposite. I want freedom. I want the freedom to pursue a career where passion is the only deciding factor, not a paycheck. I want my wife to have the freedom to continue to stay home with our kids and then pursue her passions as they grow older. I want our kids to have the freedom to follow their passion (my 3 year old son already has 6 months of college paid for thanks in part to his Netflix shares). Thankfully in America, money will give me this freedom. How do I know this? Because every step I take fighting against my consumerism, every day I’m a little more free. Ironically, my strategy to fight consumerism is to invest in it. But, this is much better than being a slave to it. A small $2,000 investment in Netflix two years ago is now worth $16,000. Turning a knife into a massive sword to slice those expenses into pieces. Is that $2,000 TV really worth the $16,000 it could turn into? When you start thinking of money as a seed to grow a tree, it really changes how you value a dollar. Everybody has the money to invest. I’ve watched my family members turn a measly $50 a month into massive gains over the years.

Two years ago I wrote How I’m Going To Sextuple My Money By 2016. Thankfully, my remaining investment in Netflix (NFLX) has octupled two years ahead of schedule. 2013 was a record year and Netflix has incredible content deal followed by incredible content deal. Though my timeline is different, my strategy stays the same.  When Netflix was on fire, I got greedy. Warren Buffett’s strategy of buying great brands when everyone hates them has by far been my most successful strategy leading to this eight-bagger. However, his wisdom of being fearful when others are greedy is even more important. Over the past year, I have been trimming my Netflix position as it continues to grow. I have paid off two cars, paid off a cash birth, and spent an incredible week in Disneyland. Markets and companies boom and bust, and the only way to truly lock in gains, is to do something with them that can never be taken away. I had a week with my family I will never forget in the Magic Kingdom. By permanently saying goodbye to our car payments (only cash car purchases from here), we are one step closer to freedom.

I’ve been waiting for a huge surge in Netflix to write this article. When friends and family would ask me my opinion on Netflix, I would say anything above 15 billion (market cap) is time to sell half. We are now at 23 billion thanks to incredible subscriber growth.

My strategy is to sell half of a position when I think it’s almost impossible to double. Then, because I know predicting the future is impossible, let the other half run forever.

I think it’s going to be incredibly difficult for Netflix to reach 46 billion dollars unless it drastically evolves into something different.  Here’s  a few valuations I am using (Using the most under rated, market cap):

• Blockbuster’s valuation peaked in 2002 at 5 billion. We are 4 times that when Blockbuster owned the world (and charged a massive premium on movie rentals)
• Time Warner (TWX) is valued at 58 billion. Time Warner is over a hundred years old and owns content Netflix only dreams of.
• You know how Netflix wants to become the next HBO? Well, HBO is 20% Of Time Warner. So, that values HBO at 11.6 billion. Time Warner also owns TNT, TBS, and CNN, Fortune, People, TIME, Warner Bros.  If Netflix doubles from here, can it become all those things that took Time Warner over a hundred years to become?

I think it’s highly unlikely. Which, is why I’m suggesting selling half to those of you who haven’t trimmed. However, if Netflix mutates into something more, like how Amazon mutated from a simple book seller to a company making tablets and drones.  How Apple became a phone maker and music seller, you want to let those other shares run forever.

That’s my second favorite investment wisdom from Warren Buffet. How long do you hold a stock? Forever. This removes the arrogance and impossible task of market timing. But remember, Mr. Buffett constantly trims his “forever” positions as well. Holding forever means always holding a core position, but also taking advantage of greed and fear.

Monty