Flummoxed by Netflix!
If you feel unlucky having had the misfortune of holding both Facebook and Netflix (NFLX) and first seeing your Facebook holdings explode and now Netflix, you might want to find a way to avoid getting flummoxed again.
Source: Google Finance
Smart investing is not just about What you hold, it’s also about When you hold and How Much you hold. The What you hold in some ways is the least important part of your investment portfolio success. Because idiosyncraticity i.e. inability to understand how available research, information, and news is going to influence an event (in this case the NFLX price), is a reality. All the news you read makes an implicit claim to see the future while being aware that no one can see the future.
Smart investing is not just about What you hold, it’s also about When you hold and How Much you hold.
The news will always seem to work, till it fails. You have no recourse against it because it’s free, maybe sent to you with goodwill, so that you can create wealth. NFLX has not fooled you, it’s your instinct to believe in your capabilities of being a great stock-picker that has let you down. 90% of us believe ourselves to be in the top 10% of the class. Overconfidence is a bias.
And there is a strong chance that you will never stop believing in your skill because how many of us can really say that we are not in the top 90% of our class, or we are at the bottom decile. This is why human beings seek confirmation bias. This is why human impulses get the best of us and this is why there is a good chance that NFLX will fool us yet again.
This is why you are your biggest enemy when it comes to investing. Investing is not for you but for the machines, especially the machines that don’t read the news. Machines that don’t read the news may not be the smartest ones but at least they don’t try extracting intelligence out of something ubiquitous (News).
The Best Performing Stock of the Decade, Financial Express, May 2020
The 10 Best Performing Stocks of the Decade, Motley Fool, Jan 2020
What a $ 1000, Investment in Netflix…., Fortune, Dec 2019
Netflix is the second best performing stock of the decade, Marketwatch, Dec 2019
Cramer Remix – Why Netflix is the best performing stock of 2018 – CNBC, May 2020
Stock market news, amplifies, exaggerates, confounds an existing bias and plays with our lizard brains. Information in its purest form can only extrapolate, not anticipate. Hence unknowingly, reading that news, we prepare ourselves for the worst decisions, repeatedly, in a vicious cycle.
Stock market news, amplifies, exaggerates, confounds an existing bias and plays with our lizard brains.
First, the news will pull you in at the most inappropriate time, exactly after Netflix’s 4000% rise, giving you a feeling of your invincibility and the stock’s capability to propel to the moon. Second; after the stock collapses, the news will make you feel miserable suggesting how wrong you were buying the stock in the first place. Meanwhile, the librarians of the internet will bury the old 2018 positive news on the 36897413 page of the search engine. No wonder 9 out 10 managers don’t beat the market.
Netflix stock had its worst day in nearly two decades, Barrons, April 2022
And now that you have a nerve-racking headache, realizing the merits of diversification, you continue to spend odd hours staring at your smartphone screen, having nightmares regarding the self directed pension investing you thought you were acing, wondering if everything is going to hell or it’s the beginning of the hell, comes the news, with its perpetual fool’s theory.
Should you Buy or Sell Netflix stock? What to consider now? Barrons, April 2022
Advert, How to Buy Netflix (NFLX) stocks and shares? Forbes Advisor, April 2022
If you don’t understand this vicious cycle, you may never do. Stock market news is an addiction, which would never dissuade you from climbing the idiosyncratic mountain in free solo mode, rather it will make you feel that you are the hero of your destiny and can create generational wealth by sitting and staring on that screen.
Stock market news is an addiction.
AlphaBlock’s solution is for people who can detach from their screens, people who believe machines can do a better job than them, people who believe they are not in the 90% smartest in their class, people who understand that news and information have limited accountability and recourse (you can’t sue the grapevine), people who are conscious that stock market information is addictive, people who understand that 12 months is not a long time for investments, people who understand that just because selecting NFLX may have turned out to be hard does not naturally mean buying S&P 500 is the best alternative.
If 6 of the 500 S&P500 stocks can make 30% of the total value, there is a lot of concentration risk that the passive S&P 500 method forces on our pensions and portfolios. S&P 500 concentrated method to build portfolios amplifies market value, which in turn triggers news about the stock, creating more interest, catching mass fancy and creating exuberant stories. This is followed by nature’s reversion. The stock falls in value and the S&P 500 method relegates the erstwhile star to an insignificant weight in the portfolio. More than 400 out of the U.S. 500 stocks own less than 20% of the total market value.
S&P 500 creates concentration risk.
Extreme valuations come with extreme risk and swings. Stories like Valeant, Facebook, NFLX, CSCO are recurrent and whenever there is a collapse, there is a performance drag in the S&P 500, which may give the passive Index portfolio months and sometimes years to recover. Because an amplifying mechanism like the S&P 500 methodology is not net wealth-generating, but wealth destroying (even if no one can beat it yet). And just because selection lacks science and carries unpredictability with it does not mean buying SPY is a gold mine.
The weighing method of S&P 500 is flawed and is the Achilles’ heel for the $100 trillion investment management industry. The 150 year old method has a bearing on our pensions and our children’s college fund. The S&P 500 method is not scientific. There is no anticipation in the method and it forces investors to buy the stock at a peak and then lets them hold it forever in hope that a new fluctuation will come and make magic again.
You don’t need a smart machine to have foresight to underweight an existing star, year after year, before it crashes. A smart machine is about When and How Much.
If a U.S. 500 model portfolio started in 2022, 2021, 2020, 2019 gave less than 0.5% weight to NFLX among the 500 stocks, ranking it as a poor performer, it is an Exceptional & Rich portfolio construction, which is agnostic to What it has in the selection, but is cognizant about When and How Much is needed to not be flummoxed.
AlphaBlock Team