Looking For The Next Netflix Or RIM? Be Wary

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Includes: AMZN, BBRY, CRM, GMCR, NFLX
by: SA Editor Rocco Pendola

I'm a painfully introspective soul. Without getting into the boring details, I tend to be harder on myself than even my worst critics. No matter what I do I ruminate on how things could have gone better, reflecting on alternative scenarios where the grass is always greener. It's an interminable battle that I fight.

Case in point. Ever since Netflix's (NASDAQ:NFLX) Q3 earnings report, I've beat myself up over having called not only Netflix's implosion, but Research in Motion's (RIMM) without making a dime off of the demise of either stock. I keep telling myself that I blew a six-figure opportunity. And it's true.

Had I invested just $5,000 to $10,000 buying puts on NFLX and RIMM - and stuck with them -- I very easily could have banked well over $100,000. As I was writing my articles on each company throughout the spring and summer I was looking at deep out-of-the-money puts but, in the name of something or another, I never pulled the trigger to the level that I should have.

I brought this up to a trader and investor I have immense respect for - fellow Seeking Alpha contributor Robert Weinstein. Here's part of his response:

Do NOT think about what you could have had or should have or whatever. Let it go. You made the right choices at the right time. We... predict the odds NOT the future.

You will end up messing up your future if you give this any weight at all. It may start to mess with your head and you could end up taking risks that you should not in search of the "winners high." I see it all the time and its highly destructive ...

NEVER and I mean never think about how much you can make, making money takes care of itself and trades are like NYC taxis, there will be another one that looks just as good shortly. You don't want to start beating yourself up trying to "find the next one" really hard, only to miss out because you rushed into something you were trying to make "fit." ALWAYS think about what you can lose, ALWAYS.

In the comments section of a recent article, another excellent SA contributor James A. Kostohryz offered similar thoughts:

Hey, and don't kick yourself too much on not having bought the put. If you did it for money-management and/or risk control reasons, be glad you did it. Don't derive the wrong lesson from this. In the long run, money management and risk-control is going to keep you solvent during the lean times when you're calls are not going your way. Those days will come. It happens to everybody. Only discipline will allow you to survive and thrive in the long run.

And when I say "you," I mean "us."

I bring this up not to place focus on my annoyance with myself or my internal conflicts, but because I think there's a lesson for many traders and investors to learn from all of this.

I cannot tell you how many readers have sent me emails and made comments to my articles asking something to the effect of So, Rocco, what's next? What's the next big short? Is it GMCR? Is it CMG? Is it AMZN?

While part of me appreciates the responses I have received, it also makes another part feel incredibly uncomfortable. What I sense from some traders and investors is the offshoot of a sort of pack mentality at play. And because I made a couple of pretty good calls, they coin me as the prophet of the day, just sitting in a catbird seat somewhere waiting for the ideal moment to pounce on my next victim. Again, I appreciate the sentiment and its source, but I think it's dangerous to come to me, or anybody else for that matter, for the next great short or to even consciously go out there and attempt to find it all on your own.

Many articles that have followed the Netflix implosion do just what I describe.

Often, the authors make little more than cursory cases for stocks they believe will fall as hard and as fast as NFLX and RIMM have. Green Mountain Coffee Roasters (NASDAQ:GMCR), Chipotle Mexican Grill (NYSE:CMG), Amazon.com (NASDAQ:AMZN) and Salesforce.com (NYSE:CRM) appear to be the most popular targets.

I am not here to say that sound short cases have not been made for any of those names or others or to offer an opinion, one way or the other, on which direction those stocks will run. That's not my intent with this article. What I hope traders and investors will do is heed the words of Weinstein and Kostohryz like I am trying to and apply them to their own situations.

Hours of hard work informed my bear case against Netflix, for example. I tore everything I could find on the company apart and put it back together again multiple times until I was as certain as one can be in this racket that Netflix, once it entered streaming full force, ceased to have a business model resembling anything close to sustainable. That's where my anger with myself for not having acted stems from.

I knew my bear case was sound. It not only called the implosion of the stock, but predicted EPS losses weeks before Netflix itself came out and said that 2012 could be a losing year. And, yet, I did not put - in any meaningful way - my own cash on the line. Other than being afraid (and I am, at least, not afraid to admit that), I have yet to come up with a good reason why I did not bet the farm against Netflix. Believe me, considering that Reed Hastings has collected about a million bucks a week off of his work on Netflix and that I have earned a tiny fraction of that irks me to no end.

But Weinstein and Kostohryz are right. Whether you missed the boat or not on NFLX or RIMM, there's nothing more dangerous than haphazardly looking for the next one. Shorts don't just fall from the sky. You can screen for high-P/E stocks and then start running around yelling that there's a bubble and when it bursts, each one of them is going to trade in double or single digits. It's so much more complicated than that though.

Don't let that psychological instinct to nail the next Netflix or RIM trick you into thinking you have an answer about a company and its stock not only before you ask the appropriate questions, but spend ample time thoroughly investigating them.

I did not go searching for NFLX or RIMM. As Weinstein suggests, they basically came to me. I don't know exactly how it happened, but I was not sitting at my desk screening stocks to short or looking for ways to make a name for myself inside of my own little personal vacuum. I was just going about the day-to-day and things came together. If I now try to forcefully replicate what I'll call "the magic" just so I can cash in, I risk watching everything fall apart.

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