Netflix shows investors the perils of trying to pick a winner
Netflix has captured the imaginations of investors over the past decade amid a stellar growth story. Now it’s teaching people a valuable lesson about money.
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Five months ago I interviewed an overseas shares specialist who said global video streaming giant Netflix had a bright future for investors.
Among popular big-tech stocks including Apple, Facebook and Google’s owner Alphabet, Netflix was the standout and its subscriber numbers could almost double within two years to 200 million, he told me.
Netflix had already proven to be a massive investment winner. If you’d bought $1000 of Netflix shares in May 2009 it was worth $64,000 by May 2019 after its stock price surged from $US6 to $US385.
Profit was forecast to continue growing strongly, and this rosy outlook came at a time when it’s easier than ever for Aussies to buy international stocks directly through online stockbrokers and platforms such as stake.com.au.
Netflix is a huge success, but success breeds competition.
Fast forward five months and Netflix’s picture is blurry at best.
Its share price has plunged by close to one-third while Apple and Alphabet shares have climbed.
Last week Netflix announced subscriber growth was below market expectations, and now it faces bruising battles with Disney and Apple’s new streaming services that will each cost Aussies less than $9 a month.
Disney+ is especially attractive for viewers and investors: where else can you stream Star Wars, then Finding Nemo, then The Avengers, then Bambi? It launches in the US on November 12 and in Australia on November 19, while the Apple TV+ service launches late this week.
So what has Netflix’s share weakness and this looming abundance of TV and movie content got to do with money and investment?
It’s simple: Don’t bet your future on picking winners.
I considered buying Netflix shares back in May after speaking with the share specialist, and am relieved I didn’t.
Someone once said there’s nothing wrong with putting all your eggs in one basket as long as it’s the right basket.
But the wacky world of finance means that the right basket can quickly become the wrong basket and your eggs will splatter over your shoes.
The secret to successful long-term investment is diversification.
Diversify your shareholdings across different companies, different sectors and different regions. If you want to take a punt on one stock, use only a small slice of your overall portfolio.
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Superannuation funds diversify members’ money across a wide range of assets including shares, property, infrastructure, bonds, cash and alternatives such as hedge funds.
And it’s not just shares and super where you can diversify.
Aussies love to own real estate and often buy investment properties near to where they live.
That puts all their property eggs in one basket. Experienced investors will spread their wings into other states — benefiting from diversification and potentially land tax savings.
You also could consider other types of property investment. Australia’s sharemarket-listed real estate investment trusts — which own residential and commercial property — have climbed 17 per cent in the past year and pay good incomes.
Overseas property trusts are another option, while people seeking income can examine corporate bonds or other debt-related investments.
Let Netflix be a lesson: Nobody knows for sure what any investment will do next.