Recent months have been pretty cruel to growth stocks. That’s putting it mildly. Go on and take a look at some of the once-faves (cough, cough Zoom) and you’ll see just how far we’ve come! I guess it all sorta went downhill when the Fed realised that inflation was proving to be a little less-than-transitory. With rates on the rise this year; not just once, but several times, it’s no wonder then that growth investors got spooked. Totally spooked.
But for one particular pandemic winner – Netflix – it just so happened that a general loss of appetite for these sort of growth stocks came head-to-head with inflation. A double whammy for a tech company that is, at its core, a consumer discretionary biz! A horrid combo when it comes to times like these. And when it came to loses, Netflix took centre stage. Its share price tumbled by ~40% when, for the first time in a decade, subscribers turned negative. They said goodbye and waved hello to an extra tenner (ish) a month.
But let’s take a look under the bonnet to see why Netlix and its deadly decline matters so much. Or does it?
First off: inflation is ~8.5%% which means that prices for literally everything is on the rise. And fast. Before you know it, inflation will be hitting double-digits. And it’s about to get a whole lost worse, what with all these lockdowns in China: a country that’s of critical importance for supply chains. Safe to say, no really knows how much damage has been done but something tells me we’re underestimating things. Read here what else you can do (apart form cancelling subscriptions) to make your money stretch farther. Psst: look at the inflation numbers and that was only a month ago.
Do You Really Need It?
Anyway, when prices rise, it means we’re having to fork out more of our money on necessities like food and fuel leaving us with less to splurge on extras from fancy food to fine holidays. This makes sense. After all, money doesn’t grow on trees and if it’s costing us almost 10% more each year to heat our homes, feed ourselves and fuel our cars then something’s seriously gotta give. Pronto. And it’s usually things like subscriptions and other such direct debits (my #1 pet peeve) that we seem to ditch first.
Watching movies is a luxury, though it doesn’t feel like it and if you’re strapped for cash, a subscription is no longer a priority. I mean think how often you use Netflix. If you use it every day, it’ll feel stickier and you’ll probably find yourself wanting to hold onto it for a lot longer but if, like me, you only find yourself watching on the odd occasion or when something cracking is on show (like Inventing Anna – a must-watch btw!) then you can most likely make do without it. But we don’t really have just the one subscription do we. The average person has five! So when prices rise we trim these off till we’re left with the one (or maybe two) that we really want.
But if this wasn’t bad enough, the war in Ukraine is seriously weighing on our sentiment. We’re less willing to spend more money on extras since the future is just so uncertain. Global growth slowed this year (hey, there stagflation) with the IMF predicting global GDP for the year will be 3.5% instead of the estimated – and hoped 4.2%. When consumer spending falls, GDP goes down with it since our spending is far more powerful that we realise: making up ~70% of our GDP. Recession on the cards? If things go on as they are, there’s a high chance of that happening. And the yield curve has already sounded the alarm bells.
Put this together, along with intense competition from rivals that’s always nasty, and it’s no surprise then that Netflix’s share price took a serious tumble.
Times, They Are a Changin’
We’ve been cooped up for too long, hovered over our screens watching Bridgerton, Squid Game and other such hits that it’s high time we move on. We want to (and should) be out, with people – IRL, doing the things we couldn’t do for so long. Like travelling, dining out, and properly socialising. Not over a rubbish Zoom screen where you have to yell “you’re on mute” for the umpteenth time.
So part of me thinks that while inflation is raging uncomfortably, we actually still want to spend. And if we spend enough we might be able to avoid a recession! Except it’s probably, no – definitely going to be on different things to what we’ve been spending on for the past two years or so. We want to dine out, to travel, to explore the world around us. I think it’s safe to say we’re fed up with the mile around our home. We want to indulge in experiences that we couldn’t do for almost two years! Over Easter weekend, there was chaos in the airports across Manchester and Birmingham. And despite airline’s warning us that travelling now won’t be without headache and hassle, we still travelled. Folk didn’t let anything stop them. I find that very telling.
We’d rather spend whatever extra cash we have on going out and about rather than being stuck at home in front of a screen. ‘Cause that was so 2020! So, we cancel our Netflix subscription and other such money-draining things in a desperate attempt to claw back some of our dosh so that we can spend it on things that are way more important to us than being a hermit when the weather is simply glorious.
Beneath all of this Netflix drama, there’s a real lesson in it for us for how we deal with investment losses.
Back in Jan, billionaire hedge fund manager and founder of Pershing Square Capital Management, Bill Ackman had bought around $1.1b in Netflix shares placing his firm as a top 20 shareholder! To him, back then, and at that price, the shares looked deliciously cheap after having already shed 44% since November. His plan was to hold it for the long-term, clearly believing that Netflix’s fundamentals offered sound value for his investors.
But then something changed. Last week, Netflix announced that it had lost around 200k subscribers in Q1 of 2022 and it looks like it’ll lose a further 2mn over the rest of the year. This is the first time in a decade where Netflix’s subscribers had not been in the green. And, as we know, investors dumped the stock and lost 40% of its market cap. In one single trading day.
If you were Bill, what would you do? Would you top up your position or would you flog it?
Bill, after having lost around $400m, sold his position. He cut his losses and moved on. He didn’t double-down on his loss-making adventure, hoping that it would reverse itself sometime someday. Instead, he made the very difficult yet courageous move to cancel Netflix. I guarantee this is 10x harder than holding on. It means you a) lost money and b) had to admit you lost money. The latter is harder. Our egos get in the way from doing that. Because if there’s anything we hate more than losing it’s admitting we’ve lost.
What got us here won’t get us there. While Netflix was once hailed as a pandemic/lockdown winner, it’s now down ~70% from its highs.
Remember that nothing lasts forever and sometimes, when an investment loses you a serious amount of money (I think a 40% decline qualifies!), it’s time to look under the bonnet. To really figure out what’s going on and whether you think the losses are way out of line with what the company’s really worth and whether you think everyone has just overestimated the damage.
If that’s not the case, do a Bill and bin it right away!
Losses only lose you more money if you hold onto them. So don’t be afraid to do the hard thing and cut the weeds and invest your capital someplace else. Don’t let that ego of yours get in the way of making you into a better investor. Losses don’t mean you’re losing. They mean you’re trying.
So keep trying. Always remain thorough in your research, before and after you’ve bought a stock. And be extra careful once a stock is in your portfolio. We have a funny habit of overestimating the things we own (aka we fall in love with our investments) by which point it’s so much harder to remain objective.
As we’ve seen, all can change in an instant. What we knew and thought to be certain turned out to be the opposite.
So, dear reader, don’t be afraid to change your mind. Stubbornness and an inability to admit we’re wrong and change course will hurt us more than as simply admitting what we thought to be true isn’t anymore.
The more objective you can be, and the more you remove emotions out of the investment equation, the better of you and your portfolio will be!
Easier said than done, but it’s sure worth a try.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.