Perfect Trades vs Perfect Investments

One of the great things about the internet and social media is all the investing and trading greats sharing their views and opinions.

And then there are random guys like me.

As I was checking in on Tesla’s results last month and reviewing the post I wrote a year ago regarding Tesla’s stumbles, realizing that I got it wrong since Tesla got a second (third? fourth? fifth?) wind while its stock price went on to new highs, and sharing that a long-term moving average is what keeps a trader who is trying to short a high-flyer from getting murdered, I started thinking about other recent examples.

The first one that immediately came to mind was the 75+ percent drop Netflix took when subscriber growth started slowing and competition from other streaming services was heating up. Take a guess when that happened – feel free to pull up a chart. If you’re like me, you can’t believe that you have to reset the chart settings to go back to 2011 – I thought it was within the last 5 years.

I remember this one so vividly because Carl Icahn, largely thanks to his son, bought a 10 percent stake in the company for $321 million, which he disclosed at the end of September, 2012. If you look at the chart from that period, the price had tanked and then stabilized for about a year before Icahn built his position.

2011-2015 NFLX Chart

Immediately after the market learned that Icahn had amassed a 10 percent stake the price of the shares started to rocket up. Icahn cut his stake in half and sold about 3 million shares for more than $850 million about a year later. He generated a 500+ percent return on his investment, took the initial risk off the table, and kept the other half until June of 2015. All in, he made ~$1.9 billion in slightly less than three years on a $321 million investment. This was a textbook example of a perfect trade.

He took his winnings from Netflix and added them to shares of Apple, which he thought represented the same opportunity Netflix did back in 2012. When making the switch, Icahn cited increasingly strong competition for the TV and movie streaming services. He turned out to be correct on the increasing competition, but was wrong on how Netflix would fare.

NFLX vs APPL

If he held onto his Apple shares over the past four years he made a very healthy return. Ironically, if he had held onto his Netflix shares he would have made even more and it would have been a perfect investment. But he didn’t make the wrong decision based on the information he had at the time. He made a killing on his trade, reduced his risk by taking money off the table, and then sold the rest of his stake when he thought there was a better opportunity.

However, the point of this post isn’t to rehash Icahn’s legendary trades, but to spare a thought for the traders who were shorting Netflix during its 75 percent drop. How many of them were unfailingly convinced of the fundamental thesis that Netflix was going to become the next Blockbuster Video as competition overtook it? How long were they able to hold on through the subsequent meteoric rise?

Or did they do the smart thing and pull the chicken cord when price crossed back above a long-term moving average?

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