As many people know, Netflix got creamed in the stock market yesterday as it traded down 35% from its previous close. This was in response to a lousy earnings report.
Hedge fund manager Bill Ackman, who runs Pershing Square Capital Management, was among the investors who suffered significant losses. He decided to exit his position with a loss of $400 million in about four months.
Ackman is no stranger to big losses in individual positions. Valeant Pharmaceuticals and Herbalife are two positions where Ackman lost over $1billion.
Ackman’s style is to seek out opportunities where he thinks stock prices are out of whack with the company’s fundamentals.
In the case of Valeant, he was long, while his position in Herbalife was a short play.
In the case of Netflix, Ackman had established a long position in January, and the stock is down over 60% since the beginning of the year.
I don’t know at what price Ackman started buying in January. I would guess soon after the sharp drop on January 21st, which was again right after a disappointing earnings report.
Nonetheless, I stumbled upon this article on Barchart this morning, where the author suggested that Ackman should’ve doubled down on his investment.
This is what cost Ackman to lose billions before, so if he hadn’t learned his lesson by now, he’d be a complete idiot.
Yet this author suggested that we will only know whether it would be a good bet to double down on Netflix in 18-24 months.
Yeah, by then the stock could literally be down to $0. Meanwhile, plenty of other stocks will have increased in price.
NEVER EVER double down on a losing position. That is a quick way to the poor house.
Consider this…. let’s say Ackman didn’t initiate his position until April 19. The stock opened that day at about $333 and closed at $348. We’ll give him the benefit of the doubt and say he bought at $333.
The stock closed at $226 yesterday. That would be a $107 loss, or 32%.
In order to break even, the stock would need to rise 47%. To speed up this breakeven possibility, you would double your investment.
The problem is, now you’ve increased the potential for a bigger loss.
In fact, as I write this, Netflix is down almost 6% today.
Stocks decline in price for a reason. If an investor such as Ackman doesn’t have all the answers, it’s a guarantee that you don’t either. And, you can damn well be sure the author of that Barchart article doesn’t know squat either.
Remember Blockbuster Video? That was a great business until the likes of Netflix came along.
Netflix now faces increasing competition as well, and this is being reflected in its business.
The moral here… always cut your losses quickly. The goal should be to make money, not be right.
This author probably has either a very small position in Netflix, or none at all. So, it’s easy for him to Monday quarterback a billionaire hedge fund manager.
But, it could be costly for anyone who reads that kind of garbage who has limited investing experience.
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