Outperforming the new Wall Street requires a unique skill set that combines book smarts with street smarts. Globalization, the contagious spread of fear and confidence in the Internet Age, and the unhealthy proportion of hedge fund activity all contribute to this new environment of volatility. In the Alpha Hunter, I shared my list of 9 exemplary elements of general investment theory that help me to navigate the wild swings of Wall Street commotion. In this article, it’s appropriate to focus on element #8: Interpret the Symbols.
If you can properly interpret collective life experience and identify the associated symbols, you will be able to outperform the market. Every stock has a ticker symbol, and every symbol stands for something beyond its associated company. The stock market serves as a modern-day weather station for the cycles of human progress or regression. Becoming a successful alpha hunter is dependent on becoming well versed in sociological symbology. A numeric understanding of stocks should serve only to reinforce a sociological thesis. Stocks are used to communicate complex ideas about the future in their price action of the present. The mistake that so many investors make is that they expect a stock to be priced based on past events or current data. It would be an easy profession if that were the case.
So what current stock ticker is representative of a sociological cycle bigger than itself? That would be Netflix, or NFLX. Mobile users crave individually tailored apps in contrast to inefficient websites in the same way consumers preferred the convenience of fast food as opposed to Mom’s home cooked meal. Investment capital is flowing into this revolutionary space. Netflix began the year as a $55 stock and has surged to $145 as investors recognize its symbolic stature as the first profitable app play on Wall Street. The first day we opened up the iPad we downloaded the Netflix app, paid the $8.99 subscription fee, and were blown away as we watched instant movies on the device. Users want to pay for the service no matter if they’re using Xbox, PS3, Blu-ray, Wii, iPad, iPhone, Apple TV or whatever other iplatform you like. Netflix is just scratching the surface with expanded content deals and international rollouts.
This is the first must-have app and it has become a must-own stock as a result. CEO Reed Hastings is doing such a great job that Steve Jobs abandoned any plan to compete against them and decided to welcome the Netflix app into the gated Apple ecosystem with a prime spot on Apple TV. Hastings has proven to be the man who can bridge the licensing gap from TV/DVD’s to streaming. He is a major player in the push toward Web TV. As long as the Netflix app can continue to progress its cooperative/profitable relationships across diverse platforms, the sociological symbolism of the NFLX allocation will be the primary driver of its stock price action, p/e ratio will be secondary. I know that causes the book smarts inside of you to cringe, but it's an important realization if you want to make money on the new Wall Street.
Disclosure: Long AAPL and NFLX