A Blog by Jonathan Low


Jan 22, 2017

Sell Netflix, Buy Blockbuster

It is especially hard, in the tech era, for many investors to shake their mental models: Apple is doomed, Facebook is for kids, Netflix streaming will never beat DVDs...

So whenever you find yourself becoming intransigent and clinging to an idea, it's time to disrupt yourself. JL

Michael Batnick comments in The Irrelevant Investor:

“The point is not that markets are efficient, you know they’re not, that’s just the model. The question is how inefficient are they?” Netflix lowered their pricing on 9-28-04. (A securities analyst) has reiterated this sale five times. You would think that after twelve years of being wrong, and watching a stock gain 4600%, you would move on, right? Wrong.The graveyard of investors is filled with people who refused to change their mind.
“The difficulty lies, not in the new ideas, but in escaping from the old ones.” Keynes
There’s nothing wrong with ideas, new or old, but the problem is that once we come public with them, it becomes incredibly difficult to change our mind. To admit that what we once believed is no longer valid can be viewed from the outside (and often times from the inside) as a sign of weakness, rather than a sign of growth. I want to look at a few real world examples of this.
Skip Bayless predicted  in the preseason that Dallas would beat Seattle in the NFC championship game. Unfortunately for Seattle, they lost Earl Thomas to injury, who is one of the best safeties in the league. It’s clear that Skip thinks it’s macho to remain ignorant or unflappable even when the evidence changes.

After Aaron Rodgers delivered one of the best performances he doubled down on his stupidity, tweeting “Congratulations to Dak Prescott for again outplaying Aaron Rodgers, again holding off Romo and again performing like a clutch MVP.” It’s true that Dak played better than any Cowboys fan could have hoped for, but come on man. This is embarrassing.
I’ll give Skip a pass, only because his job is to be outrageous. I mean, he might believe his own bullshit, I don’t know. But he gets paid to be controversial. Financial analysts on the other hand, are not entertainers, they get paid to analyze companies.
Consider Michael Pachter and Netflix. Pachter’s negative views, which continue to this day, go all the way back to the beginnings. Here is an article from 2005, when he recommended to sell Netflix and buy Blockbuster. “Pachter initiated coverage of Netflix after they lowered their pricing on 9-28-04 with a sell. Subsequently he has reiterated this sale five times and presently has a 12 month price target on the stock of $3 per share. The stock closed today at $11.20.”  You would think that after twelve years of being wrong, and watching a stock gain 4600%, that you would wave the white flag and move on, right? Wrong. In Deep Survival, Laurence Gonzales wrote”Admitting that you are lost is difficult because having no mental map, being no place, is like having no self: It’s impossible to conceive, because one of the main jobs of the organism is to adjust itself to place.” Prachter cannot admit he is lost; after last blowout quarter, he raised his price target from 60 to 68, meaning the stock would need to fall 52% from current prices to get there.
One of the best examples of being identified with an idea comes from Gene Fama and his Efficient Market Hypothesis. There is a great video with Gene Fama and Dick Thaler, where they discuss efficient market and in this one bit, they talk about bubbles, which Fama doesn’t believe in. I share a piece of the conversation below.
Thaler: “There’s a closed end mutual fund that happens to have the ticker symbol C-U-B-A. Now, closed end funds have been studied for many years. They’re a special kind of mutual fund where their shares trade on markets and the price of the shares can deviate from the value of the assets that they own. So this particular fund, although it has the ticker symbol CUBA, of course cannot invest in Cuba. A) that would be illegal and B) there are no securities. So its holdings of Cuba are zero. And for many years it traded at a discount of about 10-15% of net asset value. Meaning that you could buy $100 worth of the assets for $85-$90 which was a good bargain. Then if we look at the chart, all of the sudden one day the price sky rockets and it sells for a 70% premium and you could probably guess what happened. That was the day president Obama announced his intentions to relax relations with Cuba. So a bunch of securities you could buy for $90 on one day cost you $170 the next day. Now that I call a bubble…..I’m pretty sure Gene doesn’t think it’s smart to pay $170 for cruise ship lines and Mexican companies. And all through this period there was no change in the value of their assets.
Fama: Well it was a one-day bubble.
Thaler: No, no, it goes up and then it takes a year to come back
Fama: Well it drops most of that 170 the next day. Anyway, it’s an anecdote. There’s a difference between anecdotes and evidence.
Thaler: As you know, I have lots of these anecdotes.
poster To be fair to Fama, at one point in the conversation he said “The point is not that markets are efficient, you know they’re not, that’s just the model. The question is how inefficient are they?” So he’s not totally out of touch with reality, but he’s so tied to his work that he won’t (publicly) acknowledge that bubbles do occur from time to time.
I want to end this with two positive examples of people who have aren’t plagued with this disability. Charley Ellis is a champion of index funds, but he wasn’t always. Jack Bogle, in the foreword to Adam Smith’s SuperMoney talks about the mentality that permeated the investing landscape during the Go-Go years.
“The acceptance of this foolishness by the investment community was broad and deep. Writing in Institutional Investor in January 1968, no less an industry guru than Charles D. Ellis, then an analyst at Donaldson, Lufkin, and Jenrette, concluded that “short-term investing may actually be safer than long-term investing sometimes, and the price action of the stocks may be more important than the ‘fundamentals’ on which most research is based.”
Last week I was lucky enough to see Danny Kahneman speak and at one point he talked about how he escapes from his old ideas:
“Ideas are part of who we are. They become like possessions. Especially publicly. I mean, flip flopping is a bad word. I love changing my mind!”
How many times have you held onto a position and told yourself “this can’t possibly go any lower?” I’ve done this more times than I’d care to admit. The graveyard of investors is filled with people who refused to change their mind. No truer words have ever been spoken than John Kenneth Galbraith’s line “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”


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