My Netflix Strategy: Disciplined Avoidance

Sep.21.11 | About: Netflix, Inc. (NFLX)

It's tough to stay out of a stock when you see people making money. Such has been the case with Netflix (NASDAQ:NFLX) over the past year. I've kicked myself time and time again for not pulling the buy trigger as it went higher, and, conversely, with the recent 50% haircut, I've obviously been happy to have been watching from afar. This kind of whipsaw action is great for very active traders, but can be absolute misery for mainstream investors. My advice, despite an obvious temptation to get in on the action, is to simply avoid the stock.

Why is this my position? Easy. Netflix has too uncertain a financial future to analyze and is far too risky, in my opinion, for mainstream investors to go blindly long or short. The company's drastic strategy change and recent moves have raised everyone's hackles to a point where future fiscal uncertainty is now more certain than ever. These are times investors need discipline to keep themselves out of potential harm's way.

While I know it's more sexy to say this stock loses another 50% from here or it doubles again and goes back to $300, I'm not going to take that position, because, in all honesty, I can see it both ways. Netflix has doubled and been halved all in the span of a year, and personally I can see it happening again. If that's not risk, then I don't know what is. A lot of money has been made here, unfortunately a lot has been lost, and very quickly.

Why put yourself, or your capital in that kind of position? This is a steamroller moving in both directions, and is likely to remain one. And while it's said that the best time to invest is when there is blood in the streets, and arguably this is one of those times in a corporate lifecycle, I would argue sometimes it's best to simply watch the action from the sidelines. It's what I have done and will continue to do with NFLX. While disciplined avoidance may cost you in the short run, it may end up saving you more in the long run.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.