The Powerful Difference

Amar Pandit , CFA , CFP

Last week, the talk of the town was Netflix. Everyone I came across seemed to be talking about it. And these are people from outside the investment industry discussing Netflix and its future. This was the first time I had ever heard so many people discussing Netflix. You know the reason for this, don’t you? The stock NFLX (Netflix) had its worst day in 2 decades. Yes, the stock (not the business) had its worst day in 2 decades. NFLX was down 36% the previous day and with this the stock has dropped 63% for the year (as on April 20th, 2022).

While all the headlines were scary (intentional always to attract eyeballs), for many it simply didn’t make a difference (and rightfully so). Netflix didn’t shut down streaming. Business continued as usual. And people were binging on content (new and old).

So, what really happened?

Netflix lost 200,000 subscribers in the quarter, well below its guidance target of adding 2.5 million subscribers. Not simply this, the company also expects to lose 2 million net subscribers in the June quarter. By the way, Netflix would have added 500,000 users had it not lost 700,000 from Russia.

Essentially, growth is slowing.

This is simply normal. Every business however small and big goes through this.

The management of a world class company like Netflix will do something. According to Barrons magazine, Netflix plans to continue investing in content and monetize account sharing. The company estimates that in addition to 222 million paying households, there are 100 million using shared accounts. CEO Reed Hastings also added that they were considering rolling out ad supported – lower priced subscription tiers.

Well, this post is not a coverage of Netflix, so I will move on to yet another example before I highlight the real objective of this post (the powerful difference).

The same day I read another headline (this time in Mint), “TCS is no longer the most profitable Tata company, and that’s a good thing.

Can you guess the name of this most profitable Tata company? I asked the same set of people about this one. Many could not believe there could be a company ahead of TCS in the group but generally no one got the answer.

Do you want to give it a shot?

Well, the name is Tata Steel.

Tata Steel has already clocked profits of Rs.31,914 Crore in the first nine months of the financial year, higher than TCS’s number of Rs.28,490 Crore.

Mint, way back in 2013 also had this headline “Tata Steel to remain under pressure.” This post had a chart showing Tata Steel shares fell to their lowest levels on Thursday. The price was 68.12. It’s 1237.15 today as I am writing this post. Everyone was berating the stock at that point of time and for several years. Investors too were getting impatient as Tata Steel stock was an underperformer but since the last 2 years, fortunes seem to have changed for the stock (and the company). Most people including institutions didn’t buy when the price was low. Now it’s back in vogue till its next big fall.

Many cribbed about Tata Steel for the longest time, but can you believe this – just 20 days before the NFLX drop event (at the end of March 2022), 55% of analysts rated the stock a buy (according to Barrons)? Now 33% of them rate it as buy and 58% as Hold.

Here is the best part about the investment industry predictions. They are (almost) always wrong. I had to use “almost” as some people who think they get predictions right might be offended. You will receive Buy and Sell recommendations for the same stock 5-10 times in a decade and some people think this is intelligence or investing. It’s futile and even injurious (to your health and wealth) to believe this prediction bullshit. Author Carl Richards says “If you listen to these predictions and believe in them, you will be afflicted by something called Pretend Investor Disease (PID).” In short, Carl is saying that you are pretending to be an investor but not a real one.

The previous mighty fall for NFLX was 41% in October 2004. What would have happened if one had reacted to this news of an impending doom. One would have missed the best performing stock of the last decade.

The objective of this post was to build upon a previous post “The Upgrade” with some examples. In the process, I wish that these examples are like doses of vitamins in your investing journey.

  1. A Stock is all about Price and the collective emotions of investors. A Business on the other hand is about vision, real people (team, customers, board of directors), product, culture, patience, purpose and many other things.
  2. The person who buys a stock or mutual fund only looks at the price to make decisions. The person who buys the business or portfolio of businesses (mutual fund) behaves differently. And it’s the behavior that makes most of the difference.
  3. An Owner of a portfolio of Businesses >>>>> An Owner of a portfolio of Stocks.

Who are you and who do you behave like?