As a senior in college, some fraternity brothers and I threw ourselves into playing the stock market. Granted, I was a year or two above the other bros in ‘The Knoll Investment Group’ — they were wisely preparing for finance internships, while I was just curious about the market philosophies and animal spirits. But one of the things I learned is the difference between value investing, and simple “huck-and-chuck” short-term buying.*
In fall 2011 — at the start of the school year — Netflix was mired in the blowback from their decision to split up the DVD rental and online streaming businesses. The stock was smashed down to around $60 in November from a July high of $286, and CEO Reed Hastings got a brutal SNL treatment. A value investor — someone like Warren Buffett — would ignore public opinion, make their own assessment on Netflix management and products, and snap up the bargain-basement stock based on whether they think the company could turn around or not.
Us frat bros at the Knoll Investment Group, however, were not value investors. We had less than a year to make money, and were not about to throw our weight behind some underdog Silicon Valley firm — we wanted winners!
And that, of course, is why Wall Street mentality is fundamentally incompatible with the serendipity of pivots, learning from failures, and long-term vision. Earlier this week, Bloomberg BusinessWeek ran a story on the current state of Netflix — they’re crushing it, of course. The company’s web traffic accounts for 1/3 of all Internet traffic on a typical U.S. weeknight, with a peak around 10 p.m., and Hemlock Grove is an even bigger success than House of Cards.
Reed Hastings possesses a classic explorer’s spirit. He taught math in Africa for three years before heading to Stanford for his masters in computer science, and compares entrepreneurship to white-water kayaking — you have to focus on the “safe water and what you want to happen.” And following 2011’s debacle, the safe water was indeed very hard to find.
Part of the comeback strategy — aside from some public relations maneuvers — involved ignoring the skeptics, and staying the course. Netflix continued to focus on its streaming business, using between 10,000 and 20,000 of Amazon’s cloud servers.
Then, of course, they plotted their high-quality, highly-disruptive original entertainment — a significant shift from the company’s original “DVD delivery service” business model. The relationship with Amazon will become increasingly complicated as the two jockey for online video dominance, but for now, Netflix is just focusing on building the content pipeline, and honing its recommendation algorithms with assiduous daily tests.
The stock is presently trading at around $215.55 — no use to The Knoll Investment Group, of course, or the Wall Street analysts who hammered the stock just a few years ago (they probably picked up the stock right as it was shooting up through the mid-100s earlier this year).
In the words of Steve Jobs quoting Bob Dylan: “For the loser now will be later to win.”
*Yes, I did make up “huck-and-chuck” as a term to describe short term investing– don’t act like it doesn’t make vague sense