I was working on an article about Tilson’s short position in Netflix for GuruFocus when I saw Reed Hastings’s response.
I’ll probably end up writing an article that talks about both their points.
I don’t short stocks. Never have. Probably never will. There are a few reasons for this. One, I’ve looked at value investors who do short – and in most cases – they could have done at least as well if they never shorted a single stock. That was certainly true for Benjamin Graham. It wasn’t worth the trouble.
And that’s point number two. There are some things I can do in investing that I don’t do simply because the trouble of doing them isn’t worth the reward they bring. Once in a very long while I arbitrage an all cash deal. So far, the success rate has been great. But I haven’t had much fun doing it. It’s an oddly unenjoyable experience, buying into something for a small profit and then following it through a minefield of problems till it comes out the other side. Even when it works, it just makes me want to curl up with the annual report of some quality company I can buy and hold for a bit.
There’s a little of that in why I don’t short. Maybe a lot. I’ve seen people short stocks. And what they go through isn’t something I want to go through.
I would never short Netflix. I think it’s an amazing company. I might be biased here since I’m a long-term customer. I’ve basically switched over to instant only – I keep a one DVD plan just so I have that option – but mostly I just watch instantly. And it’s amazing how it’s changed my life.
Amazon (AMZN) is the only other company that comes close. The way they both deal with their customers actually conditions their customers to behave differently. Netflix and Amazon have molded my habits in ways no other company has.
It’s hard to explain. But I know Netflix and Amazon are the two stickiest relationships I have as a customer. They will keep getting my money for a long, long time.
Hastings and Bezos are also the two businessmen that impress me most. That’s outside of the usual suspects – guys like Warren Buffett who are really just investors. I have to admit I've gone through the archives and watched both Hastings and Bezos on Charlie Rose.
A few years back, Netflix was trading pretty cheap. It was clearly a Charlie Munger bargain. But it wasn't trading at a Ben Graham price. And, as you know, I don't pay up for growth. I don't pay up for quality. I'll buy the best stuff that's quantitatively cheap based on its past numbers and current assets. But I don't like paying for tomorrow. So I didn't buy the stock.
But I was very impressed by the company. I've come across a handful of companies like that where I knew at the time an investment would work out really well long-term. But I just couldn't justify it on the past record alone. I'm still more Ben Graham than Charlie Munger.
Is that a mistake? In the individual cases, yes, absolutely. But, overall, I still don't think so. There's some danger in the quality at a fair price approach. And there are some phenomenal returns - especially in micro caps - in the Ben Graham approach.
Still, that experience researching Netflix really made me think whether I was being irrational in sticking so close to Graham and staying so far from Munger. I knew it was a mistake not to buy Netflix at the time. And I did it anyway.
I'm not quite at the point where I actually believe that was a mistake. I'm always worried about letting new ideas into my process that could really screw things up. Being right on general process is more important than being right on a single stock. And I'm still cautious enough to think that it's better to stick to a Ben Graham approach, because the process seems less likely to lead to me fooling myself on some investment and taking a really big loss.
Anyway, it’s an interesting little saga to watch. Makes me think about shorting. About shorting good companies. And about Netflix as a business.
Of course, none of that’s real useful to me, because I don’t short stocks and I don’t buy expensive stocks.
So I’m not going to short Netflix and I’m not going to buy it.
But it’s fun watching.