Netflix (NASDAQ: NFLX)): The Carl Icahn Gambling Lesson
“I have learned that when you are lucky and/or smart enough to have made a total return of 457% in only 14 months it is time to take some of the chips off the table.” famously said by feared activist shareholder, Carl Icahn.
This was a year ago when Carl roughly halved his stake in the online movie streaming company for a $825m profit and thank the man, CEO Reed Hastings, who implemented the "poison pill" to prevent a hostile takeover by Carl in 2012. The price was in the range of $320/share.
Today, a share of Netflix will cost you roughly $326 and has dropped from a year high of $489.
Nope, we are not going to discuss a company whose PE is 88.7 times today. We are going to discuss about that particular sentence Carl Icahn has said.
Not that Mr. Icahn has been proven right mathematically by selling his shares then and not missing out a huge profit taking opportunity, in fact if he has hold on to it he may have earned more by selling later, but how many times this quote failed to float in our mind that we missed a good chance to escape the incoming tsunami that wipes out all the profit, or even end us up in a loss.
The Gambler's Mentality
When we are on a winning streak, be it in the stock market or casino, the last thing we want to do is to miss out on the maximum potential of the possible earnings.
Not that we do not know the tide may turn against us anytime, but often we think we will be there in time to leave the table when we need to.
Normally, it will lead into 2 scenarios.
1st scenario: We sell our shares
We remembered the last time we didn't sell the shares when we should have to and missed the boat. That was painful.
So this time when the portfolio turned into the green territory, our alarm bell sound. We keep monitoring the shares and once we sense that the bull run may have reached its climax, e.g. dropped by 0.5%, we throw.
Being satisfied with the 3% profit, we continue monitoring the company, like how you would monitor the likes growing on a good post you have on your social media account, to enjoy the shares burn to ashes and praise ourselves how smart we are.
It never happened.
In fact, the second day after you sold your share, it rebounded to a price above what you have sold and the trend continued until the rest of the week.
You begin to panic, blame yourself for not trusting your instinct and starting reading more and more on the company. All the news pointed to the fact that you have sold too early.
So when the share price start to correct itself, your alarm bell rang again. Feeling confident about the stock more than ever, you want to go back into the fray but you don't want to overpay for the share. So you waited.
Then it reaches a point where it is near to the price that you have sold it for and the price starts to rise again. You bought it back instantly, knowing that now is the opportunity to get back into action.
What that follows is something too familiar; you just caught the falling knife with your bare hands. The rot continues and you lost much more than what you have earned initially.
It will take you roughly a month to kick yourself in the nuts and bang your head against the wall for not following, not your instinct, but the financial homework you have done for the company. You finally sold your shares and resigned to being $5,000 poorer.
2nd scenario: We keep our shares
You know your stuff; this is not $100 stock, this is a $300 stock. It is making more than $1,000 anyway, what's there to worry about?
You are right, almost. Despite some correction along the way, the price is slowing climbing towards the $300 target you have in mind, having just surpassed the $200 mark.
Then suddenly, the macro environment changed.
Some European country may not be able to pay their debts and suddenly everything changed. But still, you believe that the fundamentals of the company you have invested in remains the same. After all, this company doesn't even operate in Europe so how will it affect them?
You hold on to the stock.
Day by day, your profit became smaller and smaller as the price kept dropping. You keep to your faith and insist that the worst will be over soon.
Then, it came to a point where your profit is so little, it pales in comparison with the $3,000 gain you could have made when the stock price is at its peak.
Since it has come to this already, what is the worst that could have happened? Making such a little profit doesn't excite you. So you hold on to it and start to refresh your "My Stock" application on your smart phone every 20 mins.
We all know how the story ends.
The price now is $30 and is dropping by the day. On good days, it doesn't move. Finally you decide to cut your loss and be $3,000 poorer.
You could have been $3,000 richer but instead you are now $3,000 poorer. That's $6,000 in between.
What we could have just have easily done is just sell it when it is giving us a return of "457%" and delete the counter from our watch list.
However we are only human and sometimes emotion does get the better of us.
If only we could have been so disciplined and remember what Carl Icahn has done with his Netflix shares, perhaps we could be driving that Porsche parked in front of the Hyatt hotel.
Maybe that's why we are not Carl Icahn.
Article by Seanbola, member of the damage prevention group and a day trader