I am the luckiest -- and unluckiest -- Netflix (NFLX 1.10%) investor you will probably ever meet. I was lucky enough to nearly nail the bottom of one of the greatest growth stocks on this side of the millennium when I made a modest investment of roughly $2,600 for 500 shares in the then broken IPO in late 2002. I was unlucky enough to sell the lion's share of my stake just a few months later.
The math is worse than you probably think. Those 500 shares after a pair of stock splits would be 7,000 shares today. I sold all but 20% of that position a few months later, and five years ago I wrote about my $505,845 mistake -- what the 80% I sold would be worth today. Netflix stock continued to appreciate. The position I sold too soon would be worth $802,179 in late 2016 and $884,709 by March 2017. The price tag on those shares is now up to nearly $2.8 million as of Friday's close.
Image source: Getty Images.
Clipping your winners is a losing strategy
The math -- once again -- gets worse. I never got rid of my pruning shears as Netflix revolutionized the way we consume video entertainment. I sold half of my remaining shares in 2016, cut my position in half again in 2018, and then once more just two weeks ago. The 97.5% of my original position that I have sold over the past 18 years would be worth nearly $3.4 million today.
There's a cruel realization process when you sell a piece of a winning position on the way up. You initially feel relief, especially if the stock appreciated to the point where it's playing such a dominant role in your portfolio. That was my case with Netflix. It continued to be my largest investment even after every haircut.
The initial exhale is followed immediately by the inhalation of pride. You won. You sold a stock for more than what you paid for it, and in my case with Netflix, more than what I had sold a chunk of it for at each earlier exit point.
It doesn't take long for the regret to sink in after that. Stocks don't break up with us. We break up with stocks. We're the ones who watch these financial exes go on to such great heights without us, and it stings. The initial euphoria I felt at every exit on the Netflix highway isn't there anymore. Looking back now I mostly feel embarrassed.
The silver lining here is that I still own a piece of that original investment. I know there aren't a lot of people out there who can say they're holding on to a wealth-altering 1,300-bagger. I've also thankfully singled out other winning investments over the years. The balance of my other stock holdings -- including where I put my Netflix sale proceeds to work -- has fared well. My portfolio isn't a one-trick pony, but I should've let that thoroughbred run. As much as the rest of my portfolio has appreciated over the years, it's not anywhere close to the $3.4 million I let get away.
What is so hard about letting your winners run? What is so instinctively difficult in the investing space about sticking with what's working? In sports, middle management, and your elementary school spelling bee, it's the top performers that move up to the next level. Why is it human nature to do the exact opposite when it comes to rebalancing your portfolio? Why do we demote what we should logically promote for getting the job done?
I don't have the answers, but I trust that you figured that out already. I'm the one who five years ago was talking about a $505,845 mistake, only to go on and chisel away at that Netflix sculptural masterpiece three more times. Buying a stock isn't complicated. Selling a stock is a mind bender. There should be an art appreciation class on the art of appreciation.
