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Cramer Said to Sell Netflix, but Why?

By Jim Mueller | More Articles
December 7, 2010 | Comments (4)

Since the summer, the market has seen tremendous gains, powered along by companies like Netflix (Nasdaq: NFLX  ) ramping up as much as 100% from the end of July, Chipotle Mexican Grill (NYSE: CMG  ) shooting up a similar amount since mid-July, and Harvest Natural Resources (NYSE: HNR  ) up, you guessed it, 100% since the end of August.

After runs like that, Jim Cramer might have you sell half to take your original investment off the table. That leaves just the "house's money" at risk.

I dislike the concept of the house's money, because it sets up the wrong mind-set for investors. In particular, that mind-set leads to the belief that it is somehow "OK" to lose that remaining investment and that you haven't somehow earned it.

Investors are ill-served by that mind-set, as it interferes with them fully benefiting from doubles, triples, or even the elusive 10-baggers.

For my full thoughts on the concept of the "house's money," click to play the video below.

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Chipotle Mexican Grill is both a Motley Fool Hidden Gems and a Rule Breakers pick. Netflix is a Stock Advisor recommendations. The Fool owns shares of Chipotle Mexican Grill and Harvest Natural Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Analyst Jim Mueller owns shares of both Netflix and Chipotle. He works for the Stock Advisor newsletter service. The Fool's disclosure policy was written by the house, but hopes you won't hold that against it.


Comments from our Foolish Readers

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  • Report this Comment On December 07, 2010, at 3:55 PM, gambatteimasu wrote:

    Jim,

    I respect your viewpoint. However, I believe you are underestimating the psychological power of Cramer's advice regarding the "house's money" concept.

    NFLX is a perfect example. You say that you want investors to hold on for 10-baggers -- a worthy and admirable suggestion. But it is precisely by reducing risk on a given position (i.e., taking some profit) that can often give an investor both the confidence and patience to let the remaining investment run all the way to 10-bagger status.

    Many short-term traders would sell *all* of their NFLX after the run it has enjoyed, especially with trailing and forward P/E's of 70-75 and 50. Cramer's suggestion represents a reasonable balance of goals in the case of NFLX.

    Just my two cents.

    Good luck,

    gambatte imasu

    no position NFLX

  • Report this Comment On December 07, 2010, at 10:00 PM, ziemz wrote:

    Cramer is saying to take profits to protect part of your investment after a huge run in the stock and then using that money to buy back in if it comes back in. So really he's right because he first said this at $209 and now its at $180 so you could take that money and buy some more now if you wanted to, if you still believe in nflix, or wait or just enjoy the profit. I say good advice on his part

  • Report this Comment On December 08, 2010, at 9:13 AM, TMFGebinr wrote:

    Hi ziemz,

    Would you feel the same if, instead, the stock price had *risen* to $238 instead? Same $29 move, opposite direction.

    Judging that decision by the outcome (it was the right decision because the stock fell) has the chain of events backwards. See http://www.scribd.com/doc/5566523/James-Montier, especially the chart at the top of page 3.

    Thanks for watching the video.

    Jim

  • Report this Comment On December 10, 2010, at 2:55 PM, cornell22 wrote:

    Jim,

    I didn't read zeimz's comment the way you did. I understood him as saying that since it went down the investor had the option of buying NFLX at a lower price, not divesting of some of the shares because it the stock price was going to go down.

    Last month I divested of two thirds of my NFLX shares primarily return to a more diverse portfolio.

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Related Tickers

5/25/2012 4:00 PM
NFLX $70.22 Down -0.05 -0.07%
Netflix CAPS Rating: **
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Harvest Natural Re… CAPS Rating: ****
CMG $400.42 Down -1.19 -0.30%
Chipotle Mexican G… CAPS Rating: **

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