THE NETFLIX SAGA – ONE MAN’S TRASH IS ANOTHER MAN’S TREASURE

Gauging from the title of this story you probably think I am about to delve into all the reasons why the sell-off in Netflix shares is overdone and why we should all be piling into the name hand over fist.  But to be honest with you, I don’t know much about Netflix’s business or whether the stock is a buy, sell or hold.  I was a subscriber 5 years ago for about 2 months and after I had seen about 100 movies and thought about all the time I was wasting away in front of the TV I sat up and said: “canceled”.  So red envelopes, ticker symbol NFLX, Whitney Tilson short – that’s about the extent of my familiarity with this company.

In the last few days I’ve read a few articles about the collapse of the stock and the various follies that led to the present situation (for those of you who aren’t familiar, NFLX raised prices and then split the company up in a move that sent the share price crashing 55%+).  But what I remember most from recent events is the publicity that Whitney Tilson of T2 Partners received from his very public short position in the name.   Late last year Tilson wrote a piece on Seeking Alpha describing why he was short.  In an unusual move just a few days later, Reed Hastings, the CEO of Netflix also wrote a piece on Seeking Alpha describing why Tilson was wrong.  The two pieces generated 650+ comments.  In the next few months the stock rallied 30%+ and Tilson then wrote another piece on SA describing why he had covered his short position.  The stock ultimately rallied almost 70% from Tilson’s initial article and then began its steady descent in the face of economic weakness and ending in the culmination of the last few weeks.

So why do I care about all of this?  Because one man’s trash is another man’s treasure.  And in these great follies there are great lessons to be learned.  I think the one takeaway here is to know your strengths.  As investors, we have to be keenly familiar with what we’re good at and what we’re bad at.  Vincent Van Gogh famously said:

“If one is master of one thing and understands one thing well, one has at the same time, insight into and understanding of many things.”

Yes, but one cannot be a master of all things.   And in both the case of Whitney Tilson and the case of Netflix we appear to have cases of brilliant people getting away from the things they have mastered.  Tilson is best known as a traditional value investor.  Netflix is known for providing an inexpensive and convenient DVD rental service.   But when they deviated from their strengths they failed or at least stumbled.   Sometimes it’s better just to recognize what you’re good at, master it and execute it.  Trying to be everything to everyone is the equivalent of getting greedy and doubling down AFTER a great run….Some will succeed using such a strategy, but more often than not great success is achieved by those who understand one thing and do it well.