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Blame Yourself, Not Reed Hastings, for Netflix's Woes

Chris Baines
July 16, 2012

Time for some tough love, tiger. 

If you bought Netflix (Nasdaq: NFLX  ) stock last year at $300, blame yourself, not Reed Hastings.

You willfully paid 137 times trailing free cash flow (and 100 times earnings) for a business. No one made you do that. Reed Hastings certainly didn't. That was an unforced error, to borrow a phrase from Warren Buffett and the tennis court. 

With that kind of multiple, you're just begging for the ghost of Ben Graham to come and haunt your portfolio (I hear he's more of a morning poltergeist). There is no margin of safety at that price tag: If the future ain't as rosy as you predict, or your fellow investors simply lose faith -- as was the case with Netflix -- you risk a permanent loss of capital. Netflix certainly hasn't been unique in this regard lately: OpenTable, Green Mountain Coffee Roasters, and Tempur-Pedic have all suffered at the hands of overvaluation.

And who can f